How do I make sure a contractor is paying their subs?

Question

I read a post from someone in the BP community. He said that he found out his contractor was not paying the subs for the work/materials they did/provided. Brings up the question. How do I know if the subs are being paid? Do I pay them directly? I have not purchased my first investment property yet but just wondering how this works? Thank you.

Steve Morris · Answer

Well, think I'd make sure that my GC is licensed and bonded to cover something like that.

If a sub puts work into a property and gets stiffed, odds are, if a sizable amount, he'd get a mechanics lien since now he has your pocket AND the GCs.

Marc Rice · Answer

@Rick Rolfe

Have your contractor sign a lien waiver. Look into this and how it protects you from mechanics liens.

Rick Rolfe · Answer

@Steve Morris. Good point Steve. Thank you.  Trust but verify.

Rick Rolfe · Answer

@Rhett Kelton. Thank you Rhett. I hate to micromanage too but I would not like any surprises later. It comes back to really vetting the contractor and having a solid contract.

Rick Rolfe · Answer

@Kenneth Garrett. Good morning Ken. Thank you. I am going to look into the lien wavers like others have suggested. Like @Rhett Kelton said he has had his GC's just pass on the sub bills to him and paid them (subs) directly. I would be ok with doing that to make sure they are being paid. It's extra work but I think its worth it. Better than a lien against my property.

Kenneth Garrett · Answer

@Rick Rolfe

Lien waivers for each contractor.  This is how new construction is handled.  The GC will forward the lien waivers before payment is submitted.  The lien waiver verifies the material a sub purchased was paid plus the subs labor matches the bid. Everything must be accounted for.  A sub or material supplier can file a mechanics lien for not being paid even though you paid the GC.  A mechanics lien goes against the property.

Rick Rolfe · Answer

@Marc Rice. Thank you Marc.

Rhett Kelton · Answer

You do need to be careful of the mechanics lien.    I haven't had to deal with it personally, but have heard stories and the headaches from the title company I use.

Making sure the GC is paying them is hard- I hate to micromanage.  But you do have to remember that "the buck stops here".  I have had the GC just pass the bill along to me before, and then paid the sub directly.  I don't know how many GC's would like this though.  And I didn't really like it either.  Marc is right, just make sure you have a strong contract.

Rick Rolfe · Answer

@Marc Rice. Thanks Marc. I have another question. Can't the sub put a mechanics lien on my property and if the contractor does not pay them they can try to recover whatever is owed to them from me? Thanks in advance

Marc Rice · Answer

@Rick Rolfe

That’s on your contractor and not your obligation. The contractor employs the subs, you employ the contractor. You could have a basic contract with the contractor outlining expectations and obligations of both parties .

How do I make sure a contractor is paying their subs?

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