The importance of preliminary notice to level the playing field

As a guy with forty years in the trades, I should have a bookcase full of stories about getting raked over the coals by customers. But when I look back at my contractor days, there were only two projects where I got burned by the customer. I learned the rules of the game the hard way. Each time, it nearly put me out of business. But it taught me a valuable lesson about the importance of preliminary notice if I want to get paid. Here’s the story that taught me never to start a job again without sending prelims first.

Getting burned on my first contracting job

I had just passed the C-2 (suspended ceilings and insulation) contractor’s licensing exam for California and was still working on what I hoped would be my last job as an employee. It was a shopping center in Santa Ana, and we were installing the suspended ceilings in the anchor unit, a grocery store. There was a sandwich shop across the street, where we would go nearly every day at lunchtime.

One day, some guy waiting for his sandwich, asked if we were working at the new shopping center, what we did, and when we would finish the job. After a couple of weeks of crossing paths at lunch, he asked me if I was interested in a side job. He was looking to change out the ceiling tiles in his real estate office, about a half a block away from the sandwich shop.

Landing a $10k project

I explained that I didn’t do side jobs, but I was about to start my own business as a suspended ceiling contractor. Long story short, we agreed on a price of $10K, and I landed my first contract. The job went without any issues, worked it over a couple of weekends until it was complete.

When it came time to get paid, that’s when everything started going sideways for me. The terms of the construction contract said the payment was due within thirty days from completion, so I got a song-and-dance from the guy for the next four weeks.

“Okay,” I thought, “he wants to keep the money in his bank account as long as possible, before he finally writes that check.”

Well, that wasn’t what he was doing after all. It’s now six weeks beyond completion, and still no check from this guy. And now my supply house is looking for their material payment from me. Yikes!

A hard lesson about the importance of preliminary notice

I was now in a severe financial jam – and on my very first project. I talked with a painter friend who had gone into business a couple of years before I did. He said that when people didn’t pay him, he would threaten to file a lien, and the payment would appear.

“The owner told me straight up that because I didn’t file a prelim notice I couldn’t file a lien, and he was off the hook.”

My friend faxed me a copy of the mechanics lien form, so I filled it out and sent the guy a copy. I assumed that when the owner saw the completed lien form, he would realize it was finally time to pay me for my work.

Boy, was I tired of waiting around to get paid by this clown. I was sure that the payment would show up in the mail within the next couple of days.

That check never did appear. Instead, I got a phone call from the property owner. He told me straight up that because I didn’t file a prelim notice I couldn’t file a lien, and he was off the hook.

The owner knew I hadn’t filed a preliminary notice since I never asked him for the prelim info. He said that he loved the new ceiling tiles and that I did a great job. Even though he loved my work, my first customer wasn’t going to pay me a single cent of the $10K that he owed me.

Learning the rules of the (payment) game

I made a lot of calls (remember, it’s 1993, and the internet was just really getting started), trying to figure out what I could do to get paid. Finally, I called my former employer, asking for some advice, and I remember what Larry told me that day.

“You can’t play the game and expect to win until you know, and then follow the rules of the game yourself.”

A snowball’s chance in hell

Every state has a process in place for filing a mechanics lien. Most states require prelims in order to be able to file, while a handful don’t. Arguably, some state laws are much better than others.

By following the rules, you will be in a much better position to get paid when the project gets finished. If you don’t follow the rules, you have a snowball’s chance in hell of ever getting paid.

It is that simple. Trust me, I speak from experience here.

Between being a commercial carpenter and a construction copywriter these days, I have heard countless conversations regarding prelims and mechanics liens. It always surprises me how so many contractors can disregard the lien process and the payment protection it provides to their bottom line.

Why don’t more contractors send prelims?

The most common excuse for not following the prelim requirements that I hear is “Oh, I don’t want to upset my customers. Sending prelims will strain my business relationships.”

I have yet to understand how following the state law could upset someone. Or why sending a document that improves communication on a project would cause a rift within your business relationship.

If someone gets upset that you follow the rules and the law, what does that say about them and their company? It would make me wonder, that’s for sure.

When a GC sent a prelim – but told me not to

On one project, the GC ask me not to file a prelim so as not to “upset” the project owner. I told that GC that the project owner needed to get up to speed with the legal requirements of contracting. I said that if a contractor doesn’t file the prelim notice, he can ultimately be cited and fined by the CA state licensing board.

“The GC asked me not to file the prelim. I asked him straight up if he had filed a prelim with the owner. I was shocked when he said yes.”

The GC asked me again, just before our scope of work was to start, not to file the prelim. So I asked him straight up if he had filed a prelim with the owner. I was a little shocked when he said yes.

And then he tried to convince me that since his prelim notice included the entire cost of the project, all of us lowly subs had “umbrella” protection, because of his prelim notice.

Sorry, it doesn’t work that way!

Prelims level the payment field

By submitting a prelim, the owner, the GC, and lender are aware that your company will be performing work. It lets them know that your company will be expecting payment for that work. Instead of straining a relationship, prelims promote transparency and payment continuity between all of the parties involved in the project.

Whether your contract for a project is $500.00 or $500,000.00, the prelim process provides equal payment protection for every contractor or supplier on the project.

The threat of a mechanics lien is a powerful motivator

As long as you have submitted your prelim info correctly, the owner/GC will have to pay you in full or risk the filing of a lien against the property. In most cases, the owner can’t sell, trade, or even refinance a property with a mechanics lien attached to it. It effectively freezes the property until the lien is satisfied and removed. (Specifics do vary from state to state.)

This fact is an essential point to remember, especially on new construction projects. Typically, new construction projects get a “construction loan” to pay for the building costs.

After final inspections and a CO (Certificate of Occupancy) is in place, the owner will want to convert the high-interest construction loan into a standard mortgage loan.

If you had to file a lien for non-payment, the owner would have to settle up with your company before he can secure the new mortgage for the property.

Sending a prelim means that your progress (monthly) billing invoices, any change orders, and even your retention payments are all protected. At some point, your company will have to get paid by the owner/GC for the completed work.

Prelims make payment faster

In most states, filing a prelim protects your right to file a mechanics lien for non-payment. GCs, owners, and lenders don’t want you to file a lien, since it creates more work for them. By filing that prelim you will be paid before the contractor who didn’t submit a required prelim.

An adequately filed prelim can be all the leverage you need to get paid on time as well. If the payment is late, suggesting that you might need to submit an NOI (Notice of Intent to Lien) or file a mechanics lien against the property can be all the grease you need to get the payment wheels turning again.

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A little help from an understanding supplier

You’re probably still wondering what happened with that first customer of mine. So here is the rest of the “burn story.”

I never did get paid for that job.

I went to the supply house to explain what had happened. My account rep sat me down with their accounts receivable manager. Together, they gave me the rundown around prelims, progress billing, conditional and unconditional waivers, and labor releases.

As for the outstanding material balance? The supply house gave me 90 days to get the balance paid off and get my account back into good standing. I managed to get them paid within six weeks, thanks to a whole lot of hustle on my end.

A New Chapter: Prelims got me paid on every project

After nearly losing my company from the get-go, you better believe that I never started another job without having the prelims ready to file again. I was able to protect project payments by submitting a few copies of a single form. Why in the world wouldn’t you properly submit prelims?

Moving forward from that first job, I got paid on every project for the next eleven years. I did have to use the threat of an NOI a couple of times for a non-payment issue. But as soon as I mentioned a lien, the payment logjam would clear. The payment would show up rather quickly.

In total, my company did approximately $11,000,000.00 of gross receipts while I was a contractor. Thanks to the $10K lesson learned on that first job, we ultimately collected over 98% of all receivables. It’s much easier to focus your limited time and energy on other aspects of your business when you don’t have to spend it chasing down payment.