Lienability of Work Performed at a Contractor's Home Office

RCW 60.04.021 provides that “any person furnishing labor, professional services, materials, or equipment for the improvement of real property shall have a lien upon the improvement for the contract price of labor, professional services, materials or equipment furnished at the instance of the owner, or the agent or construction agent of the owner.”

RCW 60.04.011 defines “contract price” as “the amount agreed upon by the contracting parties, or, if no amount is agreed upon, then the customary and reasonable charge therefore.” As every contractor knows, the contract price will always include a markup for overhead and profit, which is intended to cover (among other things) the cost of the contractor’s management and administrative personnel stationed at its home office. Most of the time, when a contractor files a lien at or near the completion of a project, it will include the amount of its unpaid overhead and profit as part of the “contract price” for which it is seeking security, and its doing so is almost never questioned by the owner or other lien claimants on the property.

Unfortunately, when owners pull the plug on projects early in the process, they tend to try to avoid responsibility for the costs the contractor has already incurred planning the project, and perhaps performing constructability reviews and value engineering at its home office, by arguing that such costs do not fall into the categories of “labor” or “professional services”.

The contractor’s first response to such arguments should be to dismiss them as missing the point. The contractor should take the position that it is entitled to the “contract price” for whatever work it has performed in furtherance of the owner’s project, including that portion of the “contract price” that is overhead and profit, which is intended to cover its costs for work performed at its home office, regardless of how that work is categorized. This approach is supported by several Washington cases that ask whether the services were independent of the contract for work at the site or part of “the contractor’s entire labor and materials contract.” Pacific Industries, Inc. v. Singh, 120 Wn.App. 1, 9 (2003).

If the contractor is forced to categorize its off-site costs, it should avoid calling them “labor” because the statute explicitly defines labor as “exertion of the powers of body or mind performed at the site…”, which seems to exclude any efforts undertaken elsewhere. This was one of the holdings in Pacific Industries, Inc. v. Singh, in which a developer sought to enforce a lien for negotiating the purchase of the subject property and negotiating contracts with various contractors on behalf of the owner, based on his assertion that such services were “labor” under the lien statute. The court rejected that claim because (among other reasons) the claimant did not perform those services at the site.

Instead, the contractor should call work performed at its home office “professional services”, because both the statute and the case law have arguably left room for recovery based on that categorization. The statute defines “professional services” as “surveying, establishing or marking the boundaries of, preparing maps, plans, or specifications for, or inspection, testing, or otherwise performing any other architectural or engineering services for the improvement of the real property.”  In the recent case of Blue Diamond Group, Inc. v. KB Seattle 1, Inc., 163 Wn.App. 449 (2011), Division 1 of the Court of Appeals held that construction management services performed pursuant to a contract limited to such services were neither “labor” (because not performed at the site) nor “professional services” because the term “construction management” did not appear in the definition set forth above. In a slightly earlier 2011 case, however, Colorado Structures, Inc. v. Blue Mountain Plaza, 159 Wn.App. 654, 246 P.3d 835 (2010), Division 3 of the Court of Appeals assumed that investigational drilling performed by a contractor fell within the definition of “professional services”, but found that a lien claim based on that activity failed for other reasons.

It seems, then, that a non-engineer or architect can claim for professional services, provided that they relate to “preparing maps, plans, or specifications for, or inspection, [or] testing” relating to the eventual improvement. Work performed at a contractor’s home office often includes preparing detailed work and safety plans, and inspecting the plans and specs prepared by others to test their constructability, and providing suggested changes to those plans and specs in order to increase efficiency or save money.  It does not seem much of a stretch to argue that such work is lienable as “professional services” under the statute.

In summary, a contractor who is terminated early in a project should seek the costs it has incurred at its home office in connection with the project as part of the overhead and profit included in the “contract price” for which it is entitled to lien under Washington law. Failing in that, it should call that work “professional services” performed in connection with preparing plans and specifications for the work, or inspecting plans already prepared and testing the constructability of those plans.

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