Some Contractors Get Paid. Some Don’t. Learn Why.

Anyone in the construction industry knows that getting paid is a challenge.  Construction Week Online conducted a poll asking their visitors to look at their accounts receivables and state whether they had any payment problems whatsoever.  Guess what?  Everyone had some type of payment problems. Literally, everyone.

This should really be no surprise.  Look at the landscape of this complicated industry.  You’re going to encounter pay-when-paid provisions, delay claims, payment scheduling, workmanship disputes, warranty disputes, scheduling challenges, and on and on.  It’s a wonder that contractors and suppliers ever get paid.  The question for contractors and suppliers is simple: How to break through the mess and get your invoices paid?  The answer may be simpler than you think, and may be found in a single and too-often-misunderstood document: the preliminary notice.

The Preliminary Notice: It’s For The Benefit Of The Owner, Not You

We’ve published a few articles to help contractors and suppliers justify sending the preliminary notice document, and one particular article addressing a big concern in the marketplace: Preliminary Notices Will Not Scare Your Customer.

Notices protect the owner, and in fact, many states will actually fine a contractor or supplier for not sending the notice. This is because the notice is a consumer protection device and not anything designed to benefit the potential lien claimant.

I’ve always been curious about this concern that the notice will be scary. First, because it’s not a reality in the marketplace, as thousands of these documents are sent every day without any event whatsoever. Second, because the document itself exists solely to benefit and inform the owner. Owners and general contractors should be tickled pink when they receive these documents.

The history behind the preliminary notice document goes back over 200 years to one of our founding fathers, Thomas Jefferson. In the early days of our nation land was being handed out to just about anyone.  Land was not all that valuable.  The development of the land was valuable, but without a strong economy or credit markets, it is was impossible to convince anyone to invest and develop the land. Thomas Jefferson invented the mechanics lien remedy to protect those who were willing to lay materials and labor into a development.

The mechanics lien remedy was invented, therefore, to protect the contractor and supplier, but as these laws grow in popularity, legislatures saw the need to do something to protect the property owners. That’s when the notices were created.  So, liens are there to protect the contractors and suppliers, but notices are not.

Notices protect the owner, and in fact, many states will actually fine a contractor or supplier for not sending the notice. This is because the notice is a consumer protection device and not anything designed to benefit the potential lien claimant. For that reason, there is no reason to fear them. Embrace them. Tell the owners and general contractors to thank you for them.  But above all else…send them…because…

General Contractors and Owners Track Who Does And Does Not Send Notice. They Pay Those Who Send Notice.

What do owners and general contractors do when they receive preliminary notices?  Well, they log them, and they keep track of which contractors or suppliers have sent them. As we’ve explored in the past on this blog there even exists software to help these parties track who sends these notices to enable those parties to “manage their legal and financial risk.”  This simply means it is helping developers and contractors manage the risk of liens.

Some Contractors Get Paid. Some Dont. Learn Why.

Textura helps owners track who did and did not send preliminary notice. If you didn’t send one, you won’t be tracked and the owner won’t care if you get paid or not.

To the right here is a screenshot from the popular software product, Textura.  Textura promotes itself to developers and general contractors as a risk management and payment processing platform. Their product is very good, and I think it’s a great idea for contractors, subcontractors, owners, suppliers, and everyone else in the contracting chain to use Textura or something like it to automate and simplify the complicated construction payment process. Simplifying the process in itself will result in less claims, delay in disagreement.  This is a fact.

Nevertheless, that does not change one of Textura’s selling points – tracking who has sent notice, and therefore, who has lien rights.

When push comes to shove, the owner and the general contractor are going to be most concerned about getting those parties paid who delivered a preliminary notice. They are using Textura or some other product to distinguish between those who did and those who did not send notice, and the notice-providing parties are prioritized over the non-notice parties.  And the prioritizing of debts is the subject of the next section.

Your Customers Don’t Pay You Because They Aren’t Prioritizing Your Bills

Some Contractors Get Paid. Some Dont. Learn Why.

All customer non-payment excuses sound the same. It’s all about whether your invoice is prioritized by your customer over their other bills.

Why aren’t your invoices being paid on time?  There have been a lot of studies on this question and the answer is always the same, and as a credit professional or business owner you probably already know the answer:  Priorities.

We explored this in greater detail in the article “Why Customers Don’t Pay And What To Do When It Happens.”  Googling the question “Why Customers Don’t Pay” will return 1.8 billion results.  This is an obvious worldwide problem.  When you review the problem, the literature in response to the problem, and the studies into the question, the same non-payment excuses appear over and over:  (i) The check is in the mail; (ii) We didn’t receive your invoice; (iii) We lost the invoice; (iv) We forgot; (v) We don’t have the money; (vi) We’re waiting on payment from someone else to pay you; etc.

These excuses may sound slightly different but the underlying reason for non-payment is the same. The customer is prioritizing other debts and bills over your debt.  The question you need to ask yourself is why?  How do you jump up the list?

The answer is actually very clear in the construction industry. Property owners and general contractors are affirmatively and obviously prioritizing some invoices over others by tracking who sent preliminary notices, and this prioritization necessarily trickles down the contracting chain.

This is why savvy companies in the construction industry always send preliminary notices. These notices prioritize your invoices above others who do not send notices.

The Results: Prioritize. Secure. Get Paid.

The result of sending preliminary notices on every construction project is pretty simple to see.  You’re not going to scare anyone away from doing business with you, and you’re going to be following the law by sending the consumer protection notice device.  More important to your bottom line, however, you’re going to be sending a document that works a double shift:

If you secure your debts, you’ll always get paid. Really, it’s that simple.

First, as we’ve discussed at length in this article, the preliminary notice is going to prioritize your invoices. The general contractor and property developer will flag your name as a party who must be paid on the project, and so if the going gets tough, you’re going to be paid prior to those who did not send notice.

Second, the notice also acts to secure your debt. If you aren’t paid or if the project runs into more serious cash problems, you’ll have the mechanics lien or bond claim remedy to rely upon.  Mechanics lien claims are very effective at getting companies paid, and accordingly, this will virtually eliminate the possibility that you won’t be paid.

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Scott Wolfe Jr

About Scott Wolfe Jr

Scott Wolfe Jr. is the CEO of zlien, a company that provides software and services to help building material supply and construction companies reduce their credit risk and default receivables through the management of mechanics lien and bond claim compliance. He is also the founding author of The Lien and Credit Journal, a leading online publication about liens, security instruments and getting paid on every account. Scott is a licensed attorney in six states with extensive experience in corporate credit management and collections law, with a specific emphasis on utilizing mechanic liens, UCC filings and other security instruments to protect and manage receivables. You can connect with him via Twitter, LinkedIn and Google+.

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