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Preventing Payment Disputes – Best Practices for Contractors

On Behalf of | Oct 29, 2024 | Firm News

Preventing Payment Disputes: Best Practices for Contractors in Washington State

Contractors face a wide range of challenges on construction projects, from ensuring quality workmanship to managing timelines and client expectations. In addition to delivering quality work on schedule, in order to succeed in this competitive business, contractors must also consider how to best prevent payment disputes in order to protect the financial wellbeing of their company. In Washington State, there are legal requirements and practical steps contractors should follow to safeguard their earnings and avoid costly disputes. Below, we outline the best practices every contractor should implement to protect themselves financially on construction projects.

1. Register with the State as Required by RCW 18.27

One of the most fundamental steps for contractors in Washington State is to ensure they are properly registered under the Washington Contractor Registration Act (RCW 18.27). This law requires all general and specialty contractors performing work in Washington to be registered with the Department of Labor & Industries (L&I). Failing to comply with this requirement can result in penalties, fines, and ineligibility to enforce contracts in court.

Key Takeaway: Ensure your contractor registration is up to date, as it’s the foundation for your legal standing in contract disputes and to obtain payment for work performed.

2. Document All Contracts in Writing

A written contract is essential for protecting your rights and defining the scope of work. Even for small projects, having a well-drafted agreement helps clarify expectations for both you and the client. At a minimum, your contract should cover:

  • The scope of work
  • Project timelines and milestones
  • Payment terms and schedule
  • Procedures for change orders
  • Warranties or guarantees

Washington State law favors contractors who have written agreements in disputes with clients. A clear and well-structured contract minimizes the risk of misunderstandings or financial disputes.

Key Takeaway: Always use written contracts, and ensure they include detailed provisions to avoid future disagreements over payment or scope of work.

3. Bill Promptly According to the Billing Schedule

An essential aspect of protecting your financial interests is adhering strictly to the billing schedule outlined in your contract. Prompt billing ensures that you maintain a steady cash flow throughout the project and allows for timely identification of potential payment issues. If the client is late on a payment or disputes an invoice, you’ll want to address it immediately rather than letting it affect future work.

To further protect your right to payment, Washington law provides contractors with lien rights under the mechanics’ lien statute (RCW 60.04). To preserve these rights, contractors must follow the statutory requirements, including sending a preliminary lien notice to the property owner within the specified time limits.

Key Takeaway: Bill according to the agreed schedule and monitor payments closely to avoid falling behind or waiving your lien rights.

4. Clearly Communicate with Clients

Maintaining clear, open communication with clients is essential to avoid misunderstandings. This becomes particularly important when unexpected issues arise on a project, such as delays, material shortages, or unforeseen conditions. Proactively communicating these challenges and the potential financial impact helps prevent disputes later on.

Additionally, use professional language in emails, and confirm verbal agreements in writing to ensure there is no miscommunication.

Key Takeaway: Clear communication fosters trust and helps reduce conflicts, especially when the project hits bumps in the road.

5. Document Change Orders, Delays, and Modifications

Construction projects rarely go exactly as planned, and changes to the scope of work are common. However, any change to the original contract—whether it’s a change order, delay, or modification—needs to be properly documented and approved in writing by the client. Verbal agreements are not sufficient to protect your interests if a dispute arises later.

Each change order should outline the additional work, revised costs, and how it impacts the project’s timeline. This level of detail ensures that you are compensated for extra work and that the client is fully aware of the changes.

Key Takeaway: Always document any changes to the project scope, cost, or schedule in writing, with client approval.

6. Keep Detailed Records

From start to finish, keeping detailed project records is key to avoiding disputes and protecting your financial interests. Maintain records of:

  • Contracts and change orders
  • Communications with the client (emails, letters, and meeting notes)
  • Work progress reports
  • Billing statements and payment receipts
  • Lien notices and releases

Having a well-organized paper trail can make a substantial difference in the event of a disagreement or legal action.

Key Takeaway: Meticulous record-keeping is a crucial defense mechanism that can help you avoid or resolve disputes efficiently.

7. Secure Proper Insurance Coverage

Construction projects involve significant risks, including property damage, injuries, and delays. Having comprehensive insurance coverage can help shield your business from unexpected costs that could harm your financial health. Some key types of insurance to consider include:

  • General Liability Insurance: Protects against claims of bodily injury or property damage.
  • Workers’ Compensation Insurance: Required by law if you have employees, this insurance covers work-related injuries or illnesses.
  • Builders Risk Insurance: Covers damage to the project while it’s under construction.
  • Professional Liability Insurance: Protects against claims of negligence in design or consulting work.

Working without adequate insurance exposes your business to lawsuits, which can be financially crippling.

Key Takeaway: Ensure you have appropriate insurance coverage to mitigate the financial risks associated with construction projects.

8. Vet Clients and Partners Thoroughly

Before signing any contract, it’s important to perform due diligence on the client or any subcontractors and suppliers you plan to work with. You can research a client’s financial health, reputation, and history of project payments. A simple credit check or reviewing public records can alert you to red flags that may indicate potential payment issues or project delays.

Likewise, thoroughly vet subcontractors and suppliers to ensure they are reliable and financially stable, as their performance directly impacts your ability to complete the project on time and within budget.

Key Takeaway: Conduct background checks on clients, subcontractors, and suppliers to reduce the risk of payment issues and performance delays.

9. Protect Lien Rights

Washington’s mechanics’ lien laws provide contractors with a powerful tool to secure payment for work performed. However, to take advantage of lien rights, contractors must follow specific steps. Securing and enforcing of liens is a complex area of law and should be discussed with legal counsel, but consider the following as a starting point:

  • Send a Preliminary Notice to the property owner if you do not have a direct contract with them. This notice informs the owner of your involvement in the project and preserves your right to file a lien if necessary.
  • If payment issues arise, you must file a Claim of Lien within 90 days of the last day you performed work or supplied materials.
  • You have an additional 8 months to file a lawsuit to enforce the lien.

By properly utilizing lien rights, you create additional pressure for clients to settle unpaid balances, as a lien can cloud the title of the property and hinder its sale or refinancing.

Key Takeaway: Understand and use your lien rights to secure payment, but be sure to follow the strict legal requirements to avoid waiving these rights.

Conclusion

By following these best practices, contractors in Washington State can better protect their financial interests and avoid unnecessary disputes. Contact Burrwood Law Group for assistance with ensuring compliance with registration requirements, developing clear written contracts, and protecting your lien rights. When these practices are in place, you’re better positioned to focus on delivering quality work and growing your business with confidence.