How do we deal with a customer who wants to blackmail us?

Hire an attorney.

First of all you must consult a lawyer in your area who is well-versed in construction law. In Wisconsin if you go through the right hoops you can obtain a lien on the real estate which lasts two years, within which you can foreclose on the lien. That tends to bring out the owner's checkbook. Theoretically you could threaten to stop work and leave the site unless she pays you according to the contract. Your lawyer will probably suggest you send her a letter by certified mail, return receipt requested. You might just as well have the lawyer write the letter. If she still refuses to pay, you can sue her for the unpaid amount. You can expect she will counterclaim for any little thing she can find, like the moulding in the living room was 1/64" narrower than expected, etc. Consult a local lawyer a.s.a.p.

There is a line to be drawn as to when it is appropriate for a lawyer to advise as to what should be done, rather than advising as to what are the legal consequences of any given decision. In other words, I can tell a client, "Your choices are A, B and C. If you do A, then here are the legal consequences, but if you do B, then this ... etc" and then it is up to the client to decide what course to take. You aren't even a client. But, let's take a look at some different scenarios. If you give in, as you point out, it will be costly. On the other hand, who's to say that she won't pull something else next? I suppose you could say, "Okay, we'll sign, but we want the money before we do any more work" Then you sign, get the money, and refuse to do the additional work. She sues you, you defend on the grounds that the agreement was void as having been made under duress. If yo do it that way, you want to make sure there is a cashier's check in hand as of the time at which you put pen to paper. Now, here's another possibility: you explain to your subs that you haven't been paid yet and you are doing everything you can to get the money. Then you give her the works: mechanic's lien, lawsuit, demand for arbitration, anything else your lawyer can think of. She will counter-claim and it will cost both of you plenty. But who knows, there may be a clause in the contract by which you can recoup. Maybe she will cave once her lawyer tells her how much it will cost her and that she's going to be on the wrong end of a judgment. Either way, lesson learned: Don't be cheap. Next time you have a project of significance, get a lawyer at the point at which you are putting the deal together. That way, you can have advance draws, an escrow agent, irrevocable letter of credit, etc. to protect yourself from this kind of situation.

Not a personal injury question is a contract question. What does your contract say you going to do if customer fails to make a payment?

Put a mechanics lien on the house.

First speak to the subcontractors to see what you can get them to do. Will they agree to merely file a mechanics lien [which I assume they have the legal right to do] and not go against you? If so, call her bluff [it is not blackmail and be careful in what wording you use ; she has merely breached the contract but has not threatened to tell others something defamatory about you unless you pay her money or do something for her]. What provisions, if any, do you have in the contract to impose sanctions against her for what she is doing? A 3/4th built house has little economic advantage for her and if her lender finds out she has breached the contract, they may recall their loan to her [assuming she took one out]. You should see a local attorney who handles construction law cases to get a demand letter sent to her stating that if she does nor immediately pay and co-operate no further work will be done, you will sue for your loss of profits, the subs will sue her, and she will have a house no one can live in. Also, since she has breached the existing contract, a new one has to be created, at her cost because she made it necessary, in which she has to pay in cash in advance for all work that is to be done, along with a penalty for the delay she has already caused, plus she has to agree to make no further demands not in the contract. If you do, at no charge, the additional work she wants, you probably will make no profit on the job, so why give in to her. But first make sure your existing contract really supports your position.

You need to find a lawyer(who drafted the construction contract?) read the contract and see if he/she agrees with your contention. Fill dirt around the foundation would typically be expected by most customers unless the contract specifically says it is extra. Landscaping would not typically be included unless specifically stated. The other items may be more disputable. Call a real estate/business lawyer and get ready to file a lawsuit.

See an attorney. Probably I would recommend you stop work and lien the residence but need more of the details and to review the contract.

If your contract calls for attorneys' fees to be awarded to the prevailing party, threaten to file suit and then she will have to pay your attorney's fees, plus interest and court costs. If not, there is little you can do but threaten to file suit and she will have to pay your court costs, which will be less than $1,000, not very much compared to the $47,000.