New Hampshire’s mechanic’s lien statute, RSA 447:2, gives a lien to those who “perform labor, provide professional design services, or furnish materials” to improve someone’s real estate. The lien “provides security against the property owner for the value of the labor or materials rendered.” Pine Gravel, Inc. v. Cianchette, 128 N.H. 460, 464 (1986). The statute is silent on how that “value” is measured, but the common practice has been to base the lien amount on the agreed price for the labor and materials provided – which naturally includes a markup for profit and overhead. This approach is supported by a reference in Anderson v. Shattuck, 76 N.H. 240, 247 (1911), to “the contract price, which is the measure of the protection afforded by the lien.”
Using the agreed contract price as the measure of lien value has some appeal because it indicates the owner’s own view on what the labor and materials are worth. But that logic fails when the owner and lienor did not contract directly. Anderson concerned a general contractor’s lien rather than a subcontractor’s lien – a distinction that Maine’s Supreme Court found significant in Bangor Roofing & Sheet Metal Co. v. Robbins Plumbing Co., 151 Me. 145, 148, 116 A.2d 664, 666 (1955): “When by express contract the parties fix the compensation to be paid for full and complete performance of the contract, they have themselves established the debt to be secured by lien. In a sense they have by binding agreement determined the extent to which the owner’s property will be enhanced by the labor and materials to be incorporated in the realty, and to that extent the contractor is protected by lien. When, as here, the owner is not party to the contract, the determination must be as to what is the fair and reasonable value of the labor and materials in place.”
Calculating the fair and reasonable value of labor and materials is no easy task. Some states presume that the subcontract price establishes reasonable value for lien purposes, and put the owner to the burden of proving otherwise. Typical is Diener v. Cubbage, 259 Md. 555, 561, 270 A.2d 471, 474 (1970) (“while the contract is not binding on the owner, the contract price is nonetheless prima facie proof of the reasonable value, and the owner has the burden of introducing evidence to show unreasonableness”).
Court decisions under New Hampshire’s public works payment bond statute, RSA 447:16, which likewise provides security for labor and materials without mention of overhead or profit, do not appear to have questioned the propriety of a bond claim based on the subcontract price. Cases under the federal Miller Act – the analogue to RSA 447:16 for federal projects – expressly support including overhead and profit. Arthur N. Olive Co. v. U.S. for Use & Benefit of Marino, 297 F.2d 70, 73 (1st Cir.1961) (“Out-of-pocket expense is not the limit of the fair value of labor and materials.”) This would seem to overturn United States ex rel. Henie v. Great American Indemnity Co., 30 F.Supp. 613 (D.N.H. 1939), which held that a subcontractor could recover under a payment bond only its actual cost of labor and materials, and not any profit thereon.
For both general contractors and subcontractors, lost profit on work not performed is never included in the lien, which “increase[es] in amount according to the progress of the work until performance is completed,” Boulia–Gorrell Lumber Co. v. East Coast Realty Co., 84 N.H. 174, 177 (1929). This makes sense. When mechanic’s liens transfer value added by improvements from the owner to the unpaid lienor, the owner’s net wealth is unaffected. Similarly, RSA 447:9 gives mechanic’s liens priority over other pre-existing liens because the increased value floats all boats, leaving them with no less draw under their hulls. But this rationale applies only when the amount of the lien matches the increase in value. Unperformed work doesn’t increase value.
The same is true of delay damages. Nevertheless, H.E. Contracting v. Franklin Pierce College, 360 F.Supp.2d 289, 295 (D.N.H. 2005), added delay damages to a general contractor’s lien amount. I couldn’t tell you why!
Using the agreed contract price as the measure of lien value has some appeal because it indicates the owner’s own view on what the labor and materials are worth. But that logic fails when the owner and lienor did not contract directly. Anderson concerned a general contractor’s lien rather than a subcontractor’s lien – a distinction that Maine’s Supreme Court found significant in Bangor Roofing & Sheet Metal Co. v. Robbins Plumbing Co., 151 Me. 145, 148, 116 A.2d 664, 666 (1955): “When by express contract the parties fix the compensation to be paid for full and complete performance of the contract, they have themselves established the debt to be secured by lien. In a sense they have by binding agreement determined the extent to which the owner’s property will be enhanced by the labor and materials to be incorporated in the realty, and to that extent the contractor is protected by lien. When, as here, the owner is not party to the contract, the determination must be as to what is the fair and reasonable value of the labor and materials in place.”
Calculating the fair and reasonable value of labor and materials is no easy task. Some states presume that the subcontract price establishes reasonable value for lien purposes, and put the owner to the burden of proving otherwise. Typical is Diener v. Cubbage, 259 Md. 555, 561, 270 A.2d 471, 474 (1970) (“while the contract is not binding on the owner, the contract price is nonetheless prima facie proof of the reasonable value, and the owner has the burden of introducing evidence to show unreasonableness”).
Court decisions under New Hampshire’s public works payment bond statute, RSA 447:16, which likewise provides security for labor and materials without mention of overhead or profit, do not appear to have questioned the propriety of a bond claim based on the subcontract price. Cases under the federal Miller Act – the analogue to RSA 447:16 for federal projects – expressly support including overhead and profit. Arthur N. Olive Co. v. U.S. for Use & Benefit of Marino, 297 F.2d 70, 73 (1st Cir.1961) (“Out-of-pocket expense is not the limit of the fair value of labor and materials.”) This would seem to overturn United States ex rel. Henie v. Great American Indemnity Co., 30 F.Supp. 613 (D.N.H. 1939), which held that a subcontractor could recover under a payment bond only its actual cost of labor and materials, and not any profit thereon.
For both general contractors and subcontractors, lost profit on work not performed is never included in the lien, which “increase[es] in amount according to the progress of the work until performance is completed,” Boulia–Gorrell Lumber Co. v. East Coast Realty Co., 84 N.H. 174, 177 (1929). This makes sense. When mechanic’s liens transfer value added by improvements from the owner to the unpaid lienor, the owner’s net wealth is unaffected. Similarly, RSA 447:9 gives mechanic’s liens priority over other pre-existing liens because the increased value floats all boats, leaving them with no less draw under their hulls. But this rationale applies only when the amount of the lien matches the increase in value. Unperformed work doesn’t increase value.
The same is true of delay damages. Nevertheless, H.E. Contracting v. Franklin Pierce College, 360 F.Supp.2d 289, 295 (D.N.H. 2005), added delay damages to a general contractor’s lien amount. I couldn’t tell you why!
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