Even when a contractor abandons a project, a homeowner must pay for all properly performed work. A homeowner is entitled to withhold an amount sufficient to find a replacement contractor in that situation. Care should be taken when withholding payment, though, as contractors have many tools at their disposal to pursue missing payments.
Homeowners Must Pay for Completed Work
A homeowner is required to pay a contractor for all properly completed work and materials supplied, even when a contractor abandons a project. While it might seem unfair to have to pay anything, under the law, a homeowner can be considered unjustly enriched when he receives work or materials for which he does not pay.
Homeowners Need Not Always Pay
A homeowner is not required to pay for defective work -- work that is not performed in a good and workmanlike manner or that does not conform to the plans and specifications. When a contractor abandons a project, a homeowner can withhold funds sufficient to find and engage a replacement contractor. She also doesn't need to release retainage to the contractor -- that is, the amount withheld from each payment, usually 5 to 10 percent, that is payable upon completion of the entire project.
A homeowner should carefully weigh the risks before withholding payment for work performed. Not only can a contractor sue an owner for breach of contract, but a contractor also can assert claims under a prompt payment act or mechanics' lien statute. A prompt payment act permits a contractor to sue an owner for amounts due, plus attorneys' fees and interest of up to 2 percent per month. Mechanics' lien statutes not only permit a contractor to sue an owner for amounts due, but they also enable a contractor to burden the property with a lien until the claim is resolved. Liens make it very difficult for an owner to borrow against or sell her property.
Protection for Property Owners
All property owners should secure written contracts with contractors. Most states have consumer protection statutes that require contractors to enter into written contracts with homeowners. These contracts should be prepared or reviewed by an experienced construction lawyer. Homeowners often sign whatever form a contractor provides, and those forms are almost always one-sided in the contractor's favor. A proper construction contract should include protections for a homeowner. It should limit the ability for contractors to pursue mechanics' lien claims and include penalty provisions that apply if a contractor abandons a project. Most importantly, it should permit the homeowner to withhold retainage from each payment made to the contractor, as contractors are far less likely to abandon a project if there is money still on the table.
Document and Communicate Everything
Whenever a homeowner withholds payment, he should document the reasons for nonpayment and communicate those reasons in writing to the contractor as soon as possible. Not only does the law require that a contractor be given an opportunity to correct defective work, but in the event of a dispute, documents are much more important than spoken words.