At the start of a new year, many companies in the construction industry have made resolutions to increase profits and/or decrease bad debt. This seems like an obvious goal, but year after year after year businesses make the same resolutions and then fail to take concrete action to make changes, and the cycle continues. For companies in the construction industry, however, there is good news. Construction companies, whether material suppliers or contractors, mom-and-pop shops or multinational corporations, have the ability radically change their bottom lines and virtually eliminate bad debt, just by taking three simple steps on every project.
Step 1: Send Preliminary Notice
It’s no secret that sending a preliminary notice on every project increases the likelihood that you’ll get paid. What may be a surprise, however, is that in some instances the failure to send a preliminary notice can result in a crime.
Sending preliminary notices works to get you paid in multiple ways. First, in many states, preliminary notices are required in order to later file a valid mechanics lien. However, even in states where this is not the case, sending preliminary notices is a benefit to all companies in the construction industry. This is because sending preliminary notices helps to prioritize your invoice over those from companies who did not send preliminary notices. And, it makes and keeps you more visible to the company with the wallet.
Many developers and/or general contractors use software to help manage risk and to serve as a payment processing platform. One popular choice is the software product Textura. Textura is a great product for the top-down management of the payment process in the construction industry. And, as you can see by the photo at right, there is a specific ability to track which parties send preliminary notices. Parties who send preliminary notices are prioritized in the payment process – that’s just a fact of business. And, you can be sure that even if a party is not using Textura, they are using something (even if it’s just a handwritten spreadsheet) to note who sends notice and who doesn’t.
Step 2: Send a Notice of Intent to Lien
While there are only a few states that require a specific Notice of Intent to Lien prior to filing a valid mechanics lien, it is none-the-less a great way to jumpstart the payment process. If nothing else, a notice of intent serves as a reminder that payment is due, and works as a quasi-demand to initiate payment. Liens are powerful tools, and sometimes, it is the mere potential of the lien filing that results in payment – and actually filing the lien never needs to occur. This is especially true in cases where preliminary notice was sent to secure the ability to file a valid lien.
Nobody wants to have their property encumbered by a mechanics lien. It makes selling, financing, and other transactions nearly impossible, and in the worst-case scenario for the property owner, the property could even be foreclosed on and sold to satisfy the debt secured by the mechanics lien. That provides a pretty significant impetus to get that invoice paid.
Step 3: File a Lien
If you are still unpaid after completing the first two steps, it’s time to file a lien. Filing a lien can be a complex process, but one of the most important steps is to comply with the preliminary notice requirements. Since compliance with preliminary notice requirements is Step 1 of the three-part process to improve your bottom line, that potentially troublesome aspect of lien validity has been taken care of. There are, however, other potential stumbling blocks on the way to a valid lien filing: the lien must contain the proper information, it must contain the proper wording, it must be filed in the correct county, it must be served properly and on the proper parties, and it must be filed within the appropriate time-period. While this can be confusing, especially since these requirements change from sate to state, there are lien service providers and/or attorneys who can make the process simple.
The good news is that a valid and properly filed lien is a strong tool to getting you the payment you deserve. When it comes down to it, if you did the work (and/or supplied the materials), and you complied with the requirements of the lien law, you will get paid. A lien is the number one collection tool for parties in the construction industry.
These three steps, if undertaken on each and every project without fail, can dramatically improve your bottom line. This year, by sending Preliminary Notices, sending Notices of Intent to Lien, and finally, by filing Mechanics Liens, the resolution to improve your business’s finances will be realized, and won’t be pushed off to next January.
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