It’s not easy to be a small business, and that’s especially true for the millions of small businesses in the construction industry. Cash management in the construction business is brutal. If you’re in charge of the books at one of these small businesses, you may have strong mixed feelings when a job comes across your desk with a particular contract. You want to say “okay.” You want to go forward with the project, and the revenue looks appealing, but you may have some reservations about the contractor. If this sounds familiar, then you really want to think about preliminary notices.
Formally speaking, saying “yes” to the project will introduce your company to something called “financial risk.” In the event your reservations about the contractor turned out to be true, it could cost your company hard-earned cash. Wouldn’t it be nice to have some insurance against this risk? If you had insurance, you could take advantage of the revenue opportunity without all of those mixed feelings.
The answer you’re looking for may be embracing your lien rights on the project.
The Type of Contractors That Should Worry You
Who are the contractors that should make the hair on your risk-averse arms go up a little bit?
Well, there are a few versions. Before getting into who all these “problem contractors” are, did you know that you can get insights on contractor payment practices here at Levelset? Find out whether a contractor is a habitual slow payer, has bad retainage practices, frequently gets liens filed against them, and more. Search our contractor payment profiles here.
Now, for the different types of payment problem contractors:
First, there are the known slow-payers. You know these guys, and that’s because everyone knows these guys. If your contract says that the general contractor must pay you within 10 days of when they get paid from the owner, there’s no chance you’ll get paid in days 1-9 with these cats. You’re getting paid on day 10, and not a minute sooner.
Second, there are contractors with cash flow issues or with suspected capital problems. Capitalizing a construction project is expensive, and just like you have to be “pre-qualified” to do a project, there’s a little bit of pre-qualification you need to do with the company hiring you. If there are capital or cash problems suspected, this is cause for concern because those problems will trickle down.
Third, and finally, there is just the plain unorganized hot mess of a contractor. They may not intend to pay you slowly, and they may not have any actual money problems, but they’re so disorganized that they can’t seem to stay out of their own way, and that can cause delays or bigger cash problems that can ripple through the entire project.
There may be other ones, too. Maybe you’re working with someone for the first time and you’re worried about what you don’t know. Maybe someone just gives you a bad feeling. Whatever it is, if you’re worried about a contractor but interested in the work, then you still have good options.
Lien Rights Put You In A Great Position And Protect Against Worst-Case Scenarios
Embracing a mechanics lien process is your answer. Note, we are not saying you need to file a mechanics lien. In fact, it’s likely you won’t need to file one. Here is how we recently explained the value of a mechanics lien process in the article identifying “3 Reasons Why You Should Think About A Mechanics Lien Process:”
You hear mechanics lien process and you think lien. I’m here to tell you that the mechanics lien process means the exact opposite. It means never filing a lien, and getting you paid at the same time.
Making certain that you’re in a good position on the project is the effect you need. Our chief legal officer, Nate Budde, recently explained this further in an article on Construction Executive titled “Pursuing Business With Risky Accounts:”
Prevailing business wisdom holds that the way to reduce credit risk is to limit credit lines, be stingy in extending credit to others, and freeze orders on past due accounts. However, by using the special financial tools available to them, companies in the construction industry are well positioned to increase business by accepting higher-risk accounts, even going so far to really pursue growth by aggressively going after such seemingly “risky” business.
The tool in question is the preliminary notice. Sending a preliminary notice is very low impact and it can single-handedly improve the hassles and delays associated with your payment processes. Read more in 3 Myths About Sending Preliminary Notices.
And most importantly with respect to that risky contractor who worries you, if push comes to shove, it protects you and puts you in a position to file a lien and avoid non-payment.