Posted by & filed under Collections, Construction, Credit, Lien Law.

May 14, 2018

By Laurie Hager, Sussman Shank

Collection of accounts receivable is vital to any business, and the construction industry is no exception. When a customer timely pays without incident, things are great. Sometimes, however, customers do not pay on time for a variety of reasons. Perhaps the customer cannot pay because of cash flow problems. Other times, a customer may choose not to pay, because it disputes work or product provided, or because of a dispute, the customer has with another party on the construction project for which the work or product was provided. Here are a few business practices that could help improve your company’s chances of getting paid in the event a customer cannot or does not willingly pay.

  1. Credit application due diligence. Before supplying to a customer on credit, obtain a signed credit application or credit agreement. Before accepting a credit application, conduct due diligence. Check the applicable state’s Secretary of State website to confirm that the customer’s correct legal entity is identified on the application. If the entity signing the credit application is a business that requires a contractor’s license, check the applicable state’s contractor’s board license information. In Oregon, it is the Oregon Construction Contractors Board:, and in Washington, it is the Department of Labor and Industries: Make sure the legal entity name on the credit application, the Secretary of State, and the contractor’s board license all match up. If there are any discrepancies between the legal entities identified in these three places, then there may be an issue enforcing the contract, lien, or bond rights. So, in the event you find any inconsistencies during the due diligence process, consider following up with the applicant to get the issue straightened out before your company extends credit.
  2. Consider getting a guarantor of the account. There are times when a customer’s business entity does not have sufficient cash or assets to pay a debt, but its principal officer or officers do. It is typically too late to get a personal guaranty of the account debt after there is a payment dispute. Thus, if you are a supplier of product or equipment, consider whether it is appropriate to require a personal guarantor when the credit account is first opened. Also, if you decide a guarantor is appropriate, you should not simply accept any person as the guarantor.  A guaranty from an employee who does not own or manage the business may not be legally or practically enforceable. Rather, conduct due diligence to determine who is a creditworthy person that is affiliated with the company and request a guaranty from that person. Multiple guarantors may be appropriate on some accounts.
  3. Periodic audits. Just because you have a credit application on file, does not mean that you are covered. Suppliers should periodically audit accounts and conduct the same due diligence described above. In between audits, pay attention to the entity listed on the customer’s checks and letterhead. If the customer’s legal entity has changed, get a new credit application with the customer’s new, correct legal entity.  If the account already had a guarantor, have the guarantor sign the new credit application. If there are reasons to now question the company’s creditworthiness (an entity dissolved by the Secretary of State could be a red flag), you may need to require different credit terms or request a new guarantor on the account, going forward.
  4. Preserve lien and bond rights. Whether you provide work, product, or equipment, if your customer is not able or willing to pay the debt, lien and bond rights may be another source of payment. Asserting these rights can also create leverage to help convince your customer to pay. The statutes applicable to public and private construction projects typically have certain notice requirements and deadlines that you must satisfy in order to protect your lien and bond rights. If you are providing work, product, or equipment for a specific construction project, determine whether it is a public or a private project. If it is a public project, for purposes of providing notices, ask for the payment bond and confirm which public body is hiring the general contractor for the project, as early as possible. If it is a private project, for purposes of providing notices, you should determine the project owner and the construction lender (if any), as soon as possible. You should be aware that some statutes require you to send notices when you first start providing work, product, or equipment to the project, even before there is any payment due or any payment dispute. Consider taking a seminar on lien and bond rights or consulting with an attorney to assist you with the notice requirements and deadlines.
  5. Put project information on invoices and purchase orders to support lien and bond rights. Regardless of whether your company provides work, product, or equipment to a construction project, it is a good practice to identify the project name on any purchase order, invoice, and delivery ticket related to that project. That way, if you need to later assert lien or bond rights, these records help confirm the amounts owed to your company for that particular project. It can also help establish last dates of delivery or work for purposes of calculating lien or bond notice and claim deadlines. Additionally, if you want to assert a claim against a customer’s contractor’s bond (if it has one), then this information will show that the customer’s work was performed in the state in which the surety bond is filed. Material suppliers often supply material without having to set foot on a project site. Thus, it is not unusual for a supplier to sell a product to a customer, either as a counter pick up or as a delivery to the customer’s location, without knowing the details of the project.  Sometimes the supplier only learns of the project if asked to deliver the material directly to the project. Consider asking for project information on all purchases over a certain dollar amount (such as over $500).


Please note that these above suggestions may not be appropriate in every situation and are not a substitute for legal advice.  If you have a question about what is appropriate for your particular business, you should consult with an attorney.

Laurie R. Hager is a commercial litigator and the Construction Group Chair at Sussman Shank LLP.  This article is not intended as legal advice.  If you want to discuss any of the issues in this article, feel free to call Laurie at 503-227-1111 or email her at

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