Relationships are an essential part of any business. In fact, one of the main ways construction companies maintain and grow business, is by forming positive relationships with customers that lead to future contracts or referrals. Sometimes, however, construction companies rely too much on relationships. If there is a customer that always pays on time and continues to provide new business, it’s easy to fall into the trap of believing that everything will always work out perfectly. However, after hearing a number of stories from levelset customers about payment problems, I wanted to draw attention to some red flags in order to promote good business practices.
Being Too Trusting is Risky
Trusting the prime contractor (typically the general contractor or whichever contractor hired you) to ensure that you get paid if a dispute arises can be a dangerous game. No state allows for a ‘blanket lien claim’, so any lien action taken by a party up the hiring chain does not generally include lower-tiered parties in the claim itself. This means that even if the general contractor properly sends preliminary documents and files a lien to secure payment, the parties the GC hired are not protected.
Why is this a problem?
Let’s say the property owner on a construction project goes into bankruptcy. The general contractor may receive a portion of its claim, but not enough to afford to pay the subcontractors and/or suppliers they hired. These subs and suppliers are left with nothing unless each of them individually followed the proper procedures to establish lien rights during the life of the project. To rely on your general contractor to ensure you get paid is dangerous.
Some States are Especially Strict
Next, while each state’s lien law varies, some are much stricter than others when it comes to establishing lien rights. States such as California or Florida require that lower-tiered parties provide preliminary notices within the early days of a project. Failure to follow protocol can be fatal to a mechanics lien claim, no matter the situation. Think that a county clerk will make an exception because of a broken promise from your trusted contractor? Think again.
Waiting Too Long Can Cause Major Problems
The filing of a Mechanics Lien is also subject to a specific deadline. As is often the case, an unpaid party may sit around and wait for the contractor that hired you to pay. Without knowing it, the contractor may hold off on payment long enough that any potential lien claimants lose out on their lien rights. Even if the contractor pays after an extended period of time, most businesses cannot afford to have their accounts receivables remain consistently uncollected. Cash is king when it comes to running a business, so failure to claim what you are owed in a timely manner is simply not smart.
Best Practices
What have I seen to be the best practice? Using lien rights to strengthen relationships on a project. Sending preliminary notices is actually more useful as a tool to provide clarity to a property owner and anyone up the chain from you by informing them that you are working on a project and letting them know how much you expect to be paid. It allows them to be actively involved in your participation in the project. Not only will you become more important on the job site, but you will even see that your invoices become a priority. By simply sending one letter, your positive relationships will extend beyond that between you and your longtime contractor. Could your business use an extra bump in work? Try this out and see for yourself.
Now I understand that one blog post won’t cause you to dramatically change your behaviors overnight. At the very least, I’m hoping that this fosters some thought. If you still don’t agree with me at all, though, I’d love to hear from you. But take this as my warning: it’s not enough to rely on trust to secure what you are fairly owed.