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Lien Value Under Fixed-Price Contracts


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Pirtle

By Mary Leigh Pirtle

The contractor in this instance contracted to design and construct a $13 million addition to a hospital under a fixed-price contract. Structured as such, the $13 million price included all costs for labor and materials and included any anticipated profits, leaving it up to the contractor to budget the construction project to ensure profits were realized.

During construction, the contractor encountered problems while drilling an elevator shaft, and the drilling caused damage to completed parts of the construction project.  A dispute arose as to whether the contractor or the hospital was liable for these damages, and ultimately, the hospital stopped paying the contractor.  In response, the contractor stopped working on the construction project and left all of his unused materials at the jobsite.  The contractor filed suit seeking to foreclose on his contractors’ lien, and the hospital filed for summary judgment arguing the contractor could not include amounts for profits and unincorporated materials into his contractors’ lien.

No lien on theoretical profits
As to the portion of the lien that concerned the contractor’s profits, the court determined that a contractor may only place a lien on profits in fixed-price contracts if the project is fully completed.  The court reasoned that the point of including profits in liens for fixed-price contracts is simply to give the contractor the full amount of the contract, instead of worrying about what part of that amount was for materials and labor and what part was built in as profit. The court further noted that profits are not capable of being determined until after the job is completed.

When a contractor completes a fixed-price contract, he earns only the pre-determined amount.  If that amount results in profits for the contractor, then the job was successful, and if not, then the contractor takes a loss on the job. The portion of profits or losses on a project is solely left up to the contractor by way of how efficiently the job is executed.  The court held that it is not possible to determine if profits or losses exist until a job complete. The court noted, for example, that a “contractor may show a profit at 74% completion, but suffer a loss at 100% completion.”  Because of this impossibility, the court held it is improper to place a lien on these theoretical profits under the circumstances. 

Unused materials do not add value to the construction project
In regards to the claim to include the materials that were furnished, but unused in the construction project, the court again denied the contractor’s claim.  Under Arkansas law, the lien claimant has the burden of showing the materials furnished were actually used in the projects.  The court determined the logic of the law was clear, “those who supply materials in an improvement have a lien on the improvement.”  Essentially, when the contractor increases the value of the project, they have a lien on the value of the increase.  In this situation, the court found it to be undisputed that the the materials were not incorporated into the construction.  Instead, they were only stored near the construction and did not improve the value of the construction.  Under this reasoning, the court held the materials delivered and stored on-site were not subject to the lien.

Practice points
The contractor in this case was unable to include his profits and unused materials in his contractors’ lien due to the unfinished state of the construction project. This case highlights the importance for contractors in Arkansas to consider the possibility of finishing projects under fixed-price contracts to recoup profits under a contractors’ lien, especially if the project is near completion.

 

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