Construction payment disputes increase

The coronavirus has been a cause for significant concern for construction businesses. Everyone from GCs to material suppliers is watching their cash closely. If construction businesses were reluctant to protect their lien rights before, times have certainly changed. In the months since the coronavirus upended cash flow in the construction economy, the industry has seen a surge in payment disputes.

The rise of payment disputes

A paycheck shouldn’t be a happy accident that just makes its way to your mailbox someday. For so long, the construction industry has just accepted that slow or partial payments are part of the job. Most contractors end up waiting for their payment, regardless of how long it takes.

According to Levelset’s 2020 Construction Payment Survey, only about half of contractors get paid within 30 days of invoicing. At the same time, fewer than 1 in 3 reported filing a mechanics lien when if they didn’t get paid.

In the past, there was simply no reason for property owners to rush to pay these contractors. Even if a subcontractor included a “late charge” clause with their payment app, they were unlikely to be paid for it.

Reluctance to prevent payment disputes

As a whole, the construction industry’s reluctance to send notices and file liens has enabled the paying parties on projects to manipulate the payment schedule. There were few if any consequences for an owner or GC who intentionally strung a subcontractor along on payment.

This allowed those who control the cash to safeguard their own accounts, by paying the contractors they know they can’t push around while the rest wait it out and hope for the best.

To make matters worse, construction businesses have historically been largely reluctant to take action over payment delays.

COVID-19 drives mechanics liens up 63%

In the wake of COVID-19, the industry appears to have woken up to the power of filing a mechanics lien to get first in line for payment. The number of liens being filed is growing quickly. Since the first stay-at-home orders in mid-March, payment disputes are up – way up.

According to monitoring data from national lien filings, mechanics lien claims jumped 63% from February to April this year.

This figure would likely be even higher had construction businesses been more comfortable protecting their payment rights before the crisis hit.

Most states have strict preliminary notice requirements that contractors and suppliers must follow before they’re allowed to file a lien claim.

Unfortunately, in the months before COVID-19, only 1 in 3 businesses reported sending preliminary notices regularly. By the time the scope of the payment problem was apparent, many companies had already lost their lien rights. It would have been too late to file a claim.

Construction’s new normal: Protecting payments at all costs

Payment problems on a construction project aren’t anything new. It takes a long time for contractors and suppliers to get paid. Unfortunately, an acceptance of payment delays appears to have made construction businesses complacent.

One thing the construction industry has learned from this crisis: Those that protect their payments are far better equipped to survive an unexpected event – like a global pandemic – than companies with laissez faire payment policies.

Can coronavirus help construction rediscover the recipe for faster payment?

The leaders in payment protection – those best suited to outlive the coronavirus – aren’t following a secret recipe.

They’ve just been using the tools that their state laws provide, and following the best practices in the industry:

  1. Opening the lines of communication with preliminary notices
  2. Documenting work with comprehensive pay apps
  3. Promoting goodwill with conditional lien waivers
  4. Firing warning shots – like a notice of intent – to help squash problems before they get serious
  5. When push comes to shove, filing a mechanics lien to secure payment

The great irony is that the steps involved in the mechanics lien process actually help prevent payment disputes.

Contractors try to choose between polite or professional

Many contractors feel that sending the notice or filing a lien will only harm their relationship with the customers. An objective look at this scenario would say that if it’s come to the point that you’re considering your legal options, the relationship is already hurting – and you’re on the receiving end of the stick.

There are ways that you can assert your rights without being impolite. In fact, preliminary notices may protect your lien rights, but they also provide a professional introduction to your company.

If payment problems do arise, a demand letter doesn’t have to be threatening or curt (although that is a tactic). It can be a line of communication that is worded reasonably.

Securing payment is a professional strategy

When your company’s well-being is at hand, it’s your responsibility to find a way to keep it afloat. There are people that depend on you to succeed. You have employees, subcontractors, and family members that need you to take payment seriously.

Demanding that you be paid for the work you completed under contract is not impolite. You are entitled to the money you earn. Dealing with non-payment is not the time to be bashful. Letting the situation carry on will do more harm to the relationship than good. In fact, allowing a payment issue to go unchecked is unprofessional.

Protecting construction payments is not just a crisis strategy

You never know when a payment problem will come up. Documenting, communicating, and filing liens are not just strategies to use during difficult times. Your company should be employing strategies to get paid faster on every construction job.

In states that require preliminary notices to protect lien rights, you may already be too far behind to catch up and take action. Likewise, some older jobs could be outside of your state’s statute by the time you even consider filing a mechanics lien. That’s a terrible place to be.

To avoid these problems, you need to do the right paperwork. If your state requires preliminary notices for lien rights, start sending them on every job.In fact, sending prelims has so many benefits, you should do it even if they aren’t required in your state.

If a pay app goes unaddressed, send an invoice reminder. If that reminder doesn’t work, well, hopefully by now you know what to do.

All the while, you should be documenting every step of the process. This includes any issues that your crew caused, and communicating anytime a problem comes up.

Protecting your rights to a file a mechanics lien helps shore up your bottom line if something happens. It doesn’t have to be a pandemic to crush your cashflow. When someone decides that your paycheck doesn’t matter, filing a lien can be the fastest way to get paid.

COVID’s lesson for construction

If COVID-19 has taught the construction industry anything, it’s that we’re always operating on a knife’s edge. The industry can go from booming to barely breathing at any moment. Going forward, there’s no excuse for not safeguarding your company and your payments.

This coronavirus has demonstrated how quickly payment disputes can spiral. When the next crisis comes, you don’t want to be sitting on unprotected invoices.

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