No matter what industry you’re a part of, payment is always a concern. This is especially true in the construction industry, where a relatively recent survey found that 0% of parties questioned stated that they were paid fairly and on time for every project. Fair payment is a legitimate concern, especially when the money (and corresponding balance of power) is concentrated at the top of the payment chain. Nobody wants to be unfair to the parties below them, but nobody wants to be the one left without a chair when the money stops, either. Fortunately for parties in the construction industry, payment security is built directly into the law,and payment can be virtually guaranteed, all you need to do is follow the proper steps.
These 5 Steps Get You Paid
Step 1 – Preliminary Notice
When each project is started, a preliminary notice should be sent pursuant to the laws of the state in which the project is located to protect future lien rights. Not only does sending a preliminary notice protect that future lien right, it also works to get companies paid by prioritizing their invoices. GCs and Owners know who did and who did not send preliminary notice, and prioritize the invoices accordingly. There are even software applications specifically designed to do this. Sending preliminary notice prioritizes your invoice, and keeps you in a secure position.
Step 2 – Notice of Intent to Lien
After the invoice has been unpaid for a specific, and set, number of days, a Notice of Intent to Lien should be sent. The specific amount of time that must elapse before this step is triggered may be set by each company individually, specific to its credit policy. The important parts are 1) that the Notice of Intent is sent, and 2) that enough time is left after the notice is sent to file a valid lien, if necessary. Notices of Intent to Lien are powerful documents, and are an integral component of a successful payment funnel. They take the place of a general demand letter, but are much more successful because they leverage the power of a potential mechanics lien.
Step 3 – Lien or Bond Claim
If the notice of Intent doesn’t successfully induce payment, the third step is filing the actual lien or bond claim. Mechanics liens are the single most powerful tool in the arsenal of a company in the construction industry to get paid. This is because the mechanics lien encumbers the property itself (as well as providing other leverage). There are two main factors to consider in determining when this step should be taken: 1) Company Policy – how long the specific company feels comfortable letting accounts simmer (and how much time was given by the notice of intent to lien?); and 2) The law of the project state. All states have mandatory deadlines by which a mechanics lien must be filed.
Step 4 – Collections (rarely necessary)
Sending the nonpaying account to collections, either internal or outsourced, can be the step that gets you paid on problematic accounts. While collections get a bad reputation, there is still some utility gained by letting a team (whether internal or external) take the time hit in attempting to get the account paid. Having a valid mechanics lien can drastically increase the potential for success in this step.
Step 5 – Legal Enforcement of the Lien (almost never necessary)
Finally, if the account has made its way all the way through to the bottom of the funnel and still remains unpaid, it’s time to file an action to enforce the mechanics lien filed in step 3. Mechanics liens may be enforced by foreclosing on the property at issue, and the lien claimant may be paid from those funds.
Conclusion
Parties in the construction industry are lucky. Despite the payment problems, and occasional unfairness of the construction payment process, everybody has the ability to secure payment on every project just by taking the proper steps. Taking the first 2 steps will get companies paid over 98% of the time. Following all the steps, when necessary, will cut write-offs down to practically zero.
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