Proper payments: When and how to pay construction contracts. (Legal Jargon).(Brief Article)

The payment process under Florida's construction lien law may be one of the more confusing parts of the development process and the one that poses the most dangers to the viability and timely completion of the project. Owners and lenders need to address the issue of making "proper payments" right from the start, by including the appropriate terms in the contract and employing mechanisms that will insure that the owner never has to pay more than the construction contract amount. If the owner fails to make proper payments, he or she may face duplicate payment applications from lienors giving notice who may validly lien the project--even though the owner has already paid the general contractor in full.

The lien law is designed to provide a balance of protections for the owners who need to rely on the construction contract sum to protect his or her investment and the rights of lienors who have also invested in the project by delivering or incorporating labor and materials in the project, expecting to be paid for them. Proper payments must be applied regardless of the size of the project--whether it is a multi-phased housing development or an individual home. "Improper payments" can be equally devastating to the owner.

It is the owner's responsibility to record a Notice of Commencement in the public records of the county where the project is located. This document contains the pertinent information for lienors to determine the identity of the owner and general contractor, the legal description and the bond company if a statutory bond is posted. The failure to record a Notice of Commencement will result in all of the payments made by the owner to be "improper." If the total amount of lienor's claims exceeds the total amount of the general contract, the owner will not be able to use that contract amount as a defense against additional lien claims. Lest the owner thinks the failure to record the Notice of Commencement will thwart lienors from being able to lien for lack of the appropriate information, lienors are entitled to rely on the building permit anyway. Also, most of the inspection agencies are refusing to perform the necessary inspections without the posting of a Notice of Commencement on the project. Lienors do not ha ve lien rights for projects that do not exceed $2,500.00 in the total amount.

According to Florida lien law, the amount of the final payment must be withheld from the contractor until the time the contractor gives the owner a final affidavit, which states that all lienors have been paid. The owner and general contractor are not required to reserve a minimum sum in the construction contract, although many contracts call for a ten percent retainage. If the contract calls for a much smaller amount, it diminishes the funds available to pay any remaining lienors. This exposes the owner to the risk that there will not be enough money to insure completion of the work. If the owner has multiple direct contracts, he or she should reserve each so that a fund is available to pay subcontractors, sub-subcontractors and materialmen for each direct contract.