Construction projects are a delicate balance. Time is money and margins are thin, so any project set back can have a serious snowball effect.
When a developer sits atop a large construction project, they often have to manage the interests of everyone involved: property owners, prospective owners, commercial and/or residential lessees, and, of course, everyone providing labor and materials during the project itself. If just one of the contractors, subs, or suppliers goes unpaid and files a mechanics lien, the whole project could go up in smoke.
But there are a few strategic steps a smart developer can take to prevent payment disputes from ever happening in the first place. Read on to learn how.
Payment Disputes Can Really Wreck a Development Project
A development project can take many forms. Sometimes, the developer and the property owner are one and the same. But in other cases (such as this example from Wisconsin), a developer could be hired by the property owner to manage a development project on land they own. But regardless of the scenario, there’s one thing that every development project will have in common — a legal document called a development agreement.
Development agreements are serious documents. They’ve got lots of ins-and-outs and what-have-you’s (those are legal terms, I promise), and these agreements regularly span 100+ pages and beyond. Often, only a paragraph or two discusses the potential of a mechanics lien filing. But when it comes to contracts, as with everything, big things can come in small packages.
When there’s a scenario where a developer is hired by the property owner to manage a project, the mechanics lien section of the development agreement will typically indicate that mechanics liens won’t be tolerated on the project. The section will often demand that the lien be quickly removed (within 30 days or so), otherwise, the developer will be in breach of the agreement. Alternatively (or perhaps additionally), some development agreements might provide that a developer must bond off any mechanics lien filed on the property.
Imagine a scenario where the developer has done everything by the book:
Payments have all been made on time, and construction has gone smoothly. But, seemingly out of nowhere, a lien is filed. A supplier to a subcontract went unpaid, and after they were unable to resolve the dispute with the sub, a lien was eventually filed on the project. Can you imagine – an entire project completed without issue, but because someone else didn’t hold up their end of the bargain, the entire project hangs on by a thread. If that lien isn’t gone in 30 days, things could get messy.
Unfortunately, this situation isn’t all that uncommon. But there’s a way to nip payment disputes in the bud: by being proactive.
How to Stop a Payment Dispute Before it Even Starts
As they say, both in life and in construction, an ounce of prevention is worth a pound of the cure. So, in the spirit of that all-too-true saying, here are 4 concrete steps that developers can take on their projects to prevent payment disputes from happening before they have a chance to occur:
1. Request a List of all Subs and Suppliers from the Prime. Set the tone from day 1. At the start of the project, a developer should ask their prime contractor(s) for a list of all of their subs and suppliers. If possible, a list of all of those parties’ subs and suppliers should be obtained, too – with all of that information at hand, a developer will have a clear view of the project and all of its participants – and importantly – the project’s payment chain. By understanding how payments will wind their way down the chain to the hands of the lowest tiered subs, suppliers, and laborers, a developer will be able to diagnose problems the second they arise.
2. Request Project Awareness Letters From Everyone On The Job. Project Awareness Letters can be a game-changer. Preliminary notices help raise awareness on a project – but for some companies, they can feel a little adversarial. While we think everyone should send preliminary notice on every project, we understand that there may be situations where sending a preliminary notice is not possible. Instead, another option is a Project Awareness Letter – it’s a simple document that fosters a spirit of collaboration from the get-go. A Project Awareness Letter takes maybe 2 minutes to fill out and can be sent automatically through levelset or by old-fashioned mail. When a developer has received them from everyone on a job, they’ll have a full and complete list of everyone on the job and who hired them. Boom.
3. Keep Track of Preliminary Notices. Much like the two strategies above, tracking which parties have sent preliminary notices will help a developer understand who is providing work on the project. But keeping track of preliminary notices has another benefit. In most states, sending preliminary notice is a requirement for filing a valid lien – and a failure to send notice will often kill an otherwise valid mechanics lien claim. So, by understanding who has sent preliminary notice, a developer can get a good idea of who has been preserving lien rights on the project. Even more importantly, a developer can know who hasn’t. If a party is threatening to lien the project and hasn’t kept up with their preliminary notice requirements, a developer will know that the threat of lien is an empty one. Or, if that lien is actually filed, they’ll know that they have the firepower to challenge the lien.
4. Collect Lien Waivers. Lien waivers are a common topic on the Construction Payment Blog. If you want to learn more about them, we’ve got a whole library on lien waivers. But this post probably covers just about everything you need: The Ultimate Guide to Lien Waivers. Anyway, collecting (and keeping an organized file of) lien waivers throughout the life of a project is another great indicator for the health of a project. If a party has been refusing to provide lien waivers – it may be an indication that there’s an issue. When utilized correctly, collecting lien waivers should be as simple as getting receipts for your construction payments.