Payment challenges in the construction industry seem all too common. The interconnected nature of the construction payment chain can make seemingly straightforward transactions take too long, and put a squeeze on companies that need to get the cash in the door to alleviate cash-flow or basic business pains. These challenges have led to construction businesses failing at a rate higher than almost any other industry. And, even when the problems don’t rise to that level, the headaches of dealing with aging or uncollectible accounts and restricted cash flow are burdensome and unwanted.
The two issues described above: (i) Getting paid faster, and (ii) Reducing write-offs, are issues common to all industries. But we’re talking here about the unique system of payments that exists in the construction industry. And fortunately, there’s a special set of construction industry-specific tools available to help companies get paid the money that they’ve earned. These tools, built into the laws of every state, are mechanics lien claims and bond claims.
Preliminary Notices – They Don’t Burn Bridges
Many people in the construction industry are worried about offending their customer by sending a preliminary notice. While the construction industry is based on relationships (this is probably true for most industries), it’s simply not true that sending notices is going to ruin your business relationships. Receiving preliminary notices helps everybody – from the property owner on down.
Preliminary notice requirements were created for the benefit of GCs, owners, and other parties at the top of the payment chain (see ‘payment chain’ graphic, right), and these parties should love receiving notice because it’s good-faith, proactive communication from lower-tier parties that alerts other project stakeholders that they’re working on the project.
Finally, sending notices is simply more professional and shows to other project stakeholders that you’re running a tight ship, and that when it comes to securing your payments, you know what you’re doing, and you mean business.
Lien and Bond Claims – Security Means Getting Paid
Mechanics liens (primarily on private projects) and bond claims (primarily on public projects) serve the same general purpose – making sure construction participants get paid what they have earned and deserve. This is accomplished by giving the lien claimant an interest, either against the improved property itself (private projects) or against a ‘pile of money’ provided by a bond (public projects). Provided certain required steps are followed, a construction participant may make a claim against the collateral if that participant is not paid for the work done to improve the property at issue. This means that, when used correctly and appropriately, these tools make sure construction companies get paid every time.
Once the decision to fully use these construction specific security rights has been made, the question then becomes how to implement that decision. In order to use mechanics lien and bond claim rights effectively, and ensure payment on every project, a company needs to i) keep its invoices in a secured position by sending proper preliminary notices, ii) file liens or bond claims when appropriate, and iii) enforce the claims when needed.
Implementing a receivables funnel accomplishes all of these objectives, and can be fully automated. The steps involved in a receivables funnel are as follows:
- Send preliminary notice to protect security rights and provide visibility of involvement on project.
- Send a notice of intent to lien to prompt payment.
- File a mechanics lien/bond claim to perfect the security interest
- File a foreclosure or bond claim enforcement suit
Following these steps to fully leverage the security provided through lien and bond claims can dramatically improve cash flow, and get you paid on every project. And, fortunately for today’s construction companies, this type of security is getting easier to use as the historic challenges to their use are fast-becoming obsolete.
The number and complexity of the lien laws and requirements (each state’s are different in multiple ways) used to be a major barrier to full-scale adoption of these rights. Now however, lien and bond rights can be managed and optimized through technology and compliance is no longer impossible from a practical standpoint.
As more companies look to using the tools provided by law to get them paid, payment problems for companies in-the-know can become a thing of the past.