I previously talked about a few common customer mentalities that lead to breakdowns in contracts between construction companies and customers. This time, I want to talk about the most difficult kind of problem to overcome from the contractor’s perspective: simple self-interest.
What is Self Interest?
“Self-interest” refers to a customer’s decision to do something because they believe it maximizes the benefit to themselves without necessarily considering whether it was what the parties agreed to or if it is a moral or ethical thing to do. It’s a much more polite and accurate term to call a customer, rather than calling them “greedy” or “ungrateful” or whatever other charged term might spring to mind when a contractor is very frustrated with a non-paying customer.
Reasons for Self Interest
Consider, for example, a customer who has received all of the recoverable depreciation for a hail damage claim after all construction work is completed. At that point, all else being equal, it is in the customer’s self-interest to avoid paying the depreciation over to the contractor. After all, he or she has both the money and the roof and they’re better off if they can keep both. Most of the time, luckily, people do what they promised to do. This is the moral and ethical thing to do, and most people put value on acting in a moral and ethical way.
But, sometimes a customer who is either willing to act dishonorably or has a good reason or rationalization why it is honorable to refuse payment. Perhaps they are angry with what they perceive, rightly or wrongly, as poor treatment or poor quality work. This is probably the easiest cause of a self-interested move by the customer, since a contractor is in a pretty good position to ensure the customer is treated with respect and the work is done properly.
Other causes of a self-interested move are harder to control. Perhaps they have a family hardship and feel compelled to use the insurance proceeds to pay some other debt. Or, perhaps the customer simply doesn’t value their promise as highly as the contractor does.
There is a stereotype out there, one that does not always apply, of a wealthy individual or large business customer being more likely to not pay as agreed. Such customers probably do feel like they have more leverage over the contractor. To the extent that a wealthy customer can afford to hire replacement contractors whenever they need to, they suffer less negative consequences for acting improperly. And, of course, wealthier people can afford lawyers to resist collection. This, plus the greater stakes involved, may make the risk of a self-interested customer refusing to pay greater the larger the contract.
How to Deal With This Type of Non-Paying Customer?
When a customer has made a decision to act purely in their own self-interest, for whatever reason, the contractor now has to calmly and correctly explain how withholding payment is not in the customer’s best interests. This starts with a good contract that has clear requirements concerning payment and, ideally for the contractor, disconnects the customer’s obligation to pay from the contractor’s obligation to warranty the work. The logic behind such a deal is that the customer is paying for work to be performed and has to pay whether the work is done correctly or not. Then, it is up to the contractor to make sure the work is properly performed and if it is not the appropriate remedy is to fix it. That way, the parties avoid subcontractor liens or other disputes related to nonpayment.
The contractor also wants to be able to point to provisions in the contract regarding penalties, interest, and recovery of collection costs and attorney fees to show that the customer will not come out ahead picking a fight with the contractor. This is probably the point at which a strong contract does the most work for the contractor short of actually litigating the case: providing the project manager or contractor’s office with good, clear reasons to show the customer how the expected value of breaching the contract is not positive. So long as the customer is acting rationally and is not being motivated purely by anger or frustration, a stronger contract presents greater risk and should modify the customer’s conclusion about the best course of action.
Contractors should remember, though, that these arguments are likely to be unpersuasive in some situations. If there really are major defects with the work, the customer or his or her attorney might conclude that the chances of prevailing on a breach of contract or negligence counterclaim are so high that they’re better off risking a lawsuit than making payment. This might not be entirely the customer’s fault. It is not difficult for an angry customer to find another contractor willing to criticize the work of another. If there is no trust in the relationship between contractor and customer, the customer might be happy to believe someone else telling them what they want to hear. A contractor’s best defense against this risk is to make sure the work is free from defects and also to document performance of the job carefully to make it easy to prove proper performance.
It might also be hard to overcome a self-interested customer if the amount in controversy is simply too high. When the amount at stake starts to exceed the cost to litigate construction issues in court, it is possible that a customer decides they are better off paying a smaller amount to counsel to play chicken with the claim than to settle, even if they expect to ultimately lose. I see this more often in cases with insurance defense counsel, frankly.
There are cases where it seems to me that the defendant knows they’re ultimately going to lose but they figure they can spend a fraction of the amount in controversy to keep the matter in litigation for months or years and gamble that they can settle for less later.
The best way to avoid self-interest is, therefore, to minimize the temptation and potential dispute. In other words, make sure that there isn’t ever a situation where the customer no longer needs the contractor and has a large balance left unpaid. On very large projects, getting regular progress payments can reduce the amount required at the end. The parties could negotiate a specific amount of “retainage,” usually something like 5% or 10%, that is specifically withheld until warranty and punch list work is done, to make the customer feel comfortable making these payments. Or, the parties could agree that payment is made by a third party like an escrow agent or the insurance company directly to the contractor so the customer is not necessarily in the loop.
Hopefully, these blog posts have been helpful in gaining some insight into some of the common reasons why relationships between contractors and customers break down. As you may have noticed, I focused here more on the customer’s decision making and emotional state more than the actual mechanics of the work. That is because, even if there are problems in the work being done, my experience is that where there is a high level of understanding and trust between the parties, those issues can be overcome.
If you are a project manager having difficulty with non-paying customers, considering these common issues might help you get ahead of the curve and smooth your collections practices. If you still have problems or want more specific advice in your situation, don’t hesitate to reach out to our experienced Denver business attorneys.
Underhill Law specializes in representing Colorado businesses and we do a great deal of work helping fix or enforce the deal between contractors and customers. For businesses, we offer attractive flat fee packages that cover much of the work related to collecting payment short of actually suing someone. Don’t wait until your deadlines expire; call our office today!