By: Preston Hawkins
Getting the job is only the first step in a successful construction project. Getting paid for the work is just as important.
Payment disputes are common in the construction industry, but some problems can be avoided long before an invoice becomes overdue. For contractors and subcontractors working in Tennessee, three areas deserve particular attention: the contract, contractor licensing, and lien rights.
Start With the Contract—and Get the Details Right
A written contract is one of the most important tools for protecting the right to payment. But simply having a contract is not enough. The parties need to make sure the agreement correctly identifies who is performing the work and who is obligated to pay.
Even something as basic as the name of the contracting party can become important.
If the business performing the work is XYZ Contracting, LLC, for example, the contract and signature block should identify the LLC—not simply the individual who owns it. The person signing should also make clear that he or she is signing in a representative capacity on behalf of the company. The presentation emphasizes both knowing the proper entity name and understanding the terminology used in the agreement because mistakes can interfere with the ability to recover under the contract.
Before work begins, contractors should therefore confirm that the contract accurately identifies the parties, the scope of work, and the entity performing the work and that it is properly executed.
Make Sure Your License Covers the Work
In Tennessee, licensing can have an enormous effect on whether a contractor ultimately gets paid.
Tennessee broadly defines contracting and generally requires a contractor’s license for projects valued at $25,000 or more, with a different threshold applicable to masonry work. The licensing requirements can apply to prime contractors as well as certain subcontractors and construction managers.
Being licensed is not simply a regulatory technicality. It can directly affect the ability to recover payment.
An unlicensed contractor seeking payment may be limited to recovering actual documented expenses through a quantum meruit claim. Profit and overhead cannot be recovered, and the contractor does not have lien rights.
Contractors should also remember that having a license is not necessarily enough. The license must be appropriate for the project.
The Tennessee Court of Appeals reinforced that point in Zelenik v. Crowell Homebuilding, LLC. There, the contractor had a $250,000 monetary limit on its license but entered into a $550,000 construction agreement. The court affirmed summary judgment for the homeowner and an award of attorney’s fees, concluding that the insufficient license constituted a violation of the Tennessee Consumer Protection Act.
Other problems can arise when a contractor is not licensed at the time of bidding, allows a license to expire during the project, loses the employee associated with the license, contracts under the wrong entity name, or exceeds the monetary limitation on the license.
The lesson is straightforward: check the license before bidding and continue monitoring it throughout the project.
And when crossing state lines, do not assume a Tennessee license is enough. Licensing laws vary significantly from state to state, and performing work without the required license can jeopardize the ability to recover payment.
Protect Your Lien Rights Before You Need Them
Mechanics’ and materialmen’s liens can provide powerful leverage when payment does not arrive, but lien rights are highly dependent on complying with statutory procedures and deadlines.
Those requirements can vary depending on whether the claimant is a contractor or subcontractor and whether the project is commercial, residential, or municipal.
There are several important Tennessee deadlines, including a Notice of Non-Payment that may need to be issued within 90 days after the end of the month in which unpaid work was performed, a Notice of Lien Claim that must be served and filed within 90 days of project completion, and a lawsuit that must generally follow within 90 days after service of the Notice of Lien Claim. A Notice of Completion can significantly shorten the available timeframe on a commercial project.
The practical takeaway is simple: do not wait until a payment dispute becomes serious to start thinking about lien deadlines.
A contractor should have a system for tracking unpaid invoices, dates work was performed, project completion, notices received, and applicable lien deadlines.
Accuracy matters as well. Tennessee law prohibits exaggerating the amount of a lien claim, and an exaggerated claim can jeopardize the entire lien.
Payment Protection Starts Before the Work Does
The best time to address a payment problem is often before there is one.
Contractors and subcontractors can reduce their risk by making sure the correct business entity signs the contract, confirming that all applicable licensing requirements and monetary limits are satisfied, monitoring licensing throughout the project, and establishing procedures to preserve lien rights as soon as payment becomes overdue.
Construction businesses understandably focus on completing projects safely, correctly, and on schedule. But the financial side of the project deserves the same attention.
Because doing good work is important. Making sure you have preserved the legal ability to get paid for that work is just as important.
This article is for informational purposes only and should not be considered legal advice. The requirements applicable to licensing and lien claims vary depending on the facts of the project and applicable law.