Construction can be a tough business. Contractors, suppliers, and laborers need to have a high degree of skill and technical knowledge to build increasingly complex things. But they also need to understand a complex and confusing payment process that is unique to the industry. In this article, we’ll break down everything you need to know about getting paid in construction.
This article covers the laws that protect you, how to use them, and the specific steps you should take on every job to avoid payment disputes and get paid on time, every time.
Getting paid in construction isn’t always easy
Because of the large amount of financial risk involved in construction, money can move very slowly on a project. In 2018, the average time to get paid for construction work was 83 days. That’s a long time. Payment delays have a detrimental effect on a construction contractor’s cash flow. But when you understand how financing a construction project works, you start to see the levers you can pull to ensure payment and even speed it up.
The people in charge of a project – the property owner, lender, general contractor – want to reduce their financial risk. Their biggest fear is sinking all of their money into a project that fails. In addition, they worry about the real risk of making double payments. As a result, they want to hold onto their money as long as they can. They want to verify that the work is complete and meets their expectations. They also want to reduce their risk of payment disputes.
The people doing the work – architects, subcontractors, suppliers, laborers, etc. – want to do quality work and get paid quickly so they can pay their employees, suppliers, and utility bills without going into debt. They need to make enough money to invest in the next construction project.
As a result of these conflicting interests, construction businesses don’t have the luxury of simply doing good work and expecting to get paid on time. In order to get paid on time in construction, you have to understand contracts, notices, pay applications, change orders, mechanics liens, bond claims…it can get overwhelming very quickly. But don’t worry; we’ll break down and explain all of it in simple terms.
Before we get into the steps you need to take to get paid in construction, it’s important to review the payment laws that construction businesses need to know.
Laws that support your right to get paid
Perhaps the single most important thing a laborer or construction business owner can do to ensure that they always get paid on time and in full is to learn the laws that protect their right to payment. Knowing what your rights are will help guide you to take the appropriate steps at the right time.
Every state has multiple statutes that protect construction businesses and laborers from going unpaid for their contributions.
Mechanics Lien Law
When it comes to getting paid in construction, few laws carry as much weight or importance as mechanics lien statutes. Every state in the US has laws that gives construction businesses the right to file a mechanics lien if they aren’t paid.
A mechanics lien is an involuntary security interest in real property – it allows the unpaid contractor to hold a claim in the property itself, preventing its sale or transfer until the debt is resolved. Generally, any person or business who makes a contribution to a permanent improvement to real property has the right to file a mechanics lien claim.
One of the many reasons that mechanics liens are so powerful is that, in most places, contractors and laborers can file a claim on their own. Bringing a contract claim against a customer is a time-consuming and very expensive proposition. Filing a mechanics lien, on the other hand, can be as simple as bringing a one-page document to your local county office.
However, it is critical to understand the ins-and-outs of the law in each state where you work. Each state has their own mechanics lien process and deadlines. If you fail to complete any one of the steps in that process on time, you can lose your right to file a lien entirely.
Public Construction Law
Typically, mechanics lien laws only apply to private or commercial construction projects. On public projects, where a government agency is the property owner, filing a mechanics lien isn’t an option. The government doesn’t allow other parties to have a security interest in their property.
A different set of laws govern these projects. Though these laws don’t allow mechanics liens, unpaid contractors and suppliers will have the right to make a different kind of claim: a claim against the payment bond.
The general contractor on a public project is typically required to purchase a payment bond from a surety. This bond guarantees that everyone on the project will get paid according to their contract. If a business isn’t paid, they can make a bond claim to recover what they’re owed.
Similar to mechanics lien laws, claimants must follow the specifics in these laws in order to retain the right to make a bond claim. Failing to follow the bond claim process could forfeit your right to use these laws to recover payment.
Prompt Payment Law
Federal and state prompt payment laws give contractors and material suppliers the right to receive payment within a specific timeframe. If a payment is late, these laws allow the unpaid party to collect an interest penalty. In some places, they are entitled to recover attorney fees and court costs as well.
On federal construction projects, the US Prompt Payment Act governs the deadline for payments. In addition, nearly every state in the US except has prompt payment laws that give contractors, subcontractors, and material suppliers the right to payment within a specific timeframe. Some states have prompt payment laws that only apply to private construction or public projects. Others have laws that apply to both.
A contract is an agreement between two parties. In a construction contract, the property owner agrees to provide something of material value – usually money – while the contractor agrees to provide services or materials in exchange.
If one side doesn’t hold up their end of the agreement, contract law provides remedies to the other party. Sometimes, the value of these late payment penalties can be far greater than the original contract amount.
However, enforcing a contract should never be the first line of defense. Contract litigation is time-consuming and expensive, and the outcome is never guaranteed. Why jump straight into a full-blown lawsuit when you have so many other options to collect payment on time?
How to get paid (faster) on every construction project
Think of getting paid as a process that involves multiple tools and steps. Each one of these tools improves your chances of collecting payment on time.
When used together in a standard procedure, these steps create a near-perfect payment guarantee, ensuring construction businesses get paid in full and on time on every job.
Before you start: Document everything
In every step, keep the most detailed records you can. If a payment dispute arises on a project, the party with the best documentation to support their case will win. At the end of the day, it doesn’t matter whether you did the work on time and according to the contract. The only thing that matters is what you can prove.
Create a document retention strategy for your construction company, so every employee who handles documents knows exactly what to keep and where to put it. Create a new project folder for each job. Whether it’s a physical paper folder or a digital version on your computer system, make sure you follow the same process every time. And back up your files!
1. Get licensed
Contractor licensing requirements are regulated by each state. The California State Licensing Board (CSLB), for example, has 43 different types of licenses. There are different licenses for general contractors, general builders, and subcontractors.
While having a contractor’s license isn’t always required for every construction project, it adds an extra layer of payment protection. Licensing requirements can be complicated. You might think that you don’t need a license, only to find out later that you did.
If you don’t have a contractor license, and you perform work that requires one, there’s a good chance that you could lose any legal recourse if you’re unpaid. You can lose your right to file a mechanics lien, bond claim, or even a lawsuit to recover payment.
2. Write a credit policy
A credit policy contains your company’s process for providing credit to your customer. Unless you get paid before you perform the work or provide materials, you are always providing your customer with credit.
The credit policy should provide the steps and schedule you follow on every project to collect payment. It should describe the steps you will take when payments aren’t made according to the agreement. In addition to information about late payment penalties or sending accounts to collections, a credit policy should include your mechanics lien policy as well. This document outlines the steps you will take when you’re not getting paid on time on each construction project.
For example: 15 days after payment is overdue, the company will send a notice of intent to lien. The company will file a mechanics lien on all past due accounts before the filing deadline.
Your credit policy should never be up for debate or discussion – a policy means you follow the same procedure every time, regardless of who’s on the other side.
3. Prequalify potential customers
As the saying goes, “don’t count your chickens…” You know how that ends. Before you ever sign a contract, the first step is to prequalify your customer. It doesn’t matter how lucrative the contract is – if the property owner or GC can’t make the payment, you’re worse off than when you started.
Prequalifying your customer means researching their payment practices and financial history. If you’re a general contractor, ask the property owner for financial information on the project. Is the funding already in place for the entire job? Or are they still looking for investors? It’s important to make sure that the owner has solid financial backing to complete the project.
If you’re a subcontractor, prequalifying the general contractor means reviewing information about their past payment performance. After all, this is the person responsible for making sure you get paid. Check their credit history.
View your contractor’s score
Search Levelset’s Contractor Profiles to view recent payment problems, liens, subcontractor reviews, and more.
Visit their Contractor Profile to review their history of non-payment to other subcontractors. Ask them to provide financial information about the project. Talk to previous subcontractors or suppliers that they worked with to get first-hand accounts.
Of course, the general contractor isn’t in total control of payments on a construction job. The project’s financing could dry up, or a homeowner could stiff them, too. But they are responsible for collecting payment from the property owner. It’s the GC’s responsibility to make sure that every subcontractor and supplier is getting paid.
If you notice a string of red flags on recent projects, it may be a better idea to walk away from the project. Getting paid in construction is often about choosing the right projects to work on, and the right customers to work for.
4. Get the contract in writing
While verbal agreements still technically constitute a construction contract, the details can be impossible to prove. Can you work on a job without a written agreement? Yes. Is it a good idea? No.
Fortunately, a construction contract doesn’t have to be a complicated affair. A contract is essentially a promise. You are promising to provide quality labor or materials, while the homeowner or GC is promising to pay you for it.
However, it is important to be clear about the expectations for each side of the contract. The agreement should outline exactly what you will be providing and when. It should also spell out how much you will be paid and when. Every construction contract should include the payment terms that both parties can agree on.
There are some common types of standard construction contracts, but it’s important to understand what you’re agreeing to. Are you working on a lump sum contract? Will you be receiving progress payments at regular intervals? Are they withholding retainage? When will you receive final payment?
In addition, it should be clear about the consequences of late payments. Will there be an interest charge for late payments? When does it apply?
If your customer is providing a contract for you to sign, have a construction lawyer read the terms carefully. In construction, some common contract clauses can significantly damage the rights of contractors and suppliers. Watch out for them.
While you’re at it, review the Prime Contract as well (between the owner and the GC). Most subcontracts will adopt the provisions of the contracts above it by default. It’s important to understand what you’re signing up for.
5. Collect information about the property and other parties
After you sign the contract, but before the project begins, collect all of the information that you’ll need to make sure you get paid. You will need this information to complete preliminary notices, payment applications, lien or bond claims, etc. Use a project information sheet to ensure you collect the same information on every project.
Before the job begins, collect as much information about the project and people in charge as possible. If you wait to collect this information when you’re in the middle of a payment dispute, you will have a lot more trouble trying to track it down or request it. Make this information collection part of your process at the beginning of every project.
I’ve listed some do-it-yourself options below. But if you’re sending a lot of payment documents (and you should), try Levelset’s Scout Research Team. We have a team of people who do this research every day. They’ve even been known to track down hard-to-find details by calling coffee shops next door to the project location and talking to a barista who knows the property owner. Really.
Property owner’s legal name & address
If you have a contract with the owner, their information will be on it. Getting the property owner’s information becomes a problem for sub-tier parties. The further removed you are from the top of the payment chain on a project, the more hoops you have to jump through to get it.
There are a few ways to get the property owner’s info:
- Check the property records at the County Assessor’s office. Some states even allow you to look this up online.
- Look up the notice of commencement, if one exists. In some states, property owners are required to file this document with the county recorder.
- Request it from your hiring party or the GC. If you’ve already received a copy of the Prime Contract, the information should be in there. But it never hurts to contact the general contractor directly to request project info.
Your hiring party’s legal name & address
This one is also fairly simple, since you can get this information from the contract. But it helps to double-check the business name on the contract with the one in the Secretary of State’s office, and make sure you have the company’s legal business name. If you end up needing to file a lien, getting your customer’s business name wrong could invalidate the claim.
Property address & legal property description
Getting the property address might seem straightforward, but this can be one of the most complicated. A mailing or street address isn’t always enough to legally identify a property. And if you fail to identify the property accurately, the notices or documents you send could be invalid.
In 11 states, a full legal property description is required. Check your state’s mechanics lien laws to learn exactly what information is required to identify a property in a payment dispute.
The steps to find the property information are generally the same as finding the property owner’s information.
In some states, if there is a lender on the project, you must send preliminary notice and other documents to them, too. Even if it’s not required, getting the lender involved in a slow payment problem can help you get paid much faster. After all, they control the purse strings, and want to avoid a payment dispute as much as anyone.
In some states, like California, the GC is required to provide this information upon request. However, the consequences for failing to comply with the request aren’t clear. Submit a project information request, but don’t rely on it as the only source.
It can be a better idea to check the building permit or the construction trust deed. Either of these should contain the lender information.
Bond surety information
If you’re working on a public, government project, you will need to know the information of the surety providing the payment bond. You may be required to send preliminary notice to them. And in the event a bond claim is necessary to get paid, you will need to notify the bond surety company.
The easiest way to get ahold of the surety’s information is to ask the GC for a copy of the payment bond. You’re entitled to this information by law, so don’t be shy. Again, this information is much easier to collect at the beginning of a project, well before any payment problem arises.
6. Track your deadlines
When you’re starting a new project, create a system for tracking the deadlines on the project. Missing a deadline to send a required notice or document can destroy your right to pursue payment.
Every state has their own deadlines for steps you must take in order to file a mechanics lien or bond claim. This includes a specific timeframe for sending preliminary notice, serving a notice of intent, and actually filing a claim. In addition, your state’s prompt payment laws set a deadline for progress payments, final payment, and retainage.
You won’t necessarily know all of your deadlines at the beginning of the project. You will need to update certain deadlines as the job progresses. For example, after submitting a pay application for a progress payment, you will have a new lien filing deadline for that amount. In many states, the time period to file a mechanics lien is based on the last day you performed work or provided materials that you billed for.
Use your deadlines as a reference point, but don’t wait until the last day to take action. In most cases, you can send a notice or file a lien well before the deadline.
7. Send Preliminary Notice
Sending preliminary notice is the first step in the lien process. Sometimes called pre lien notices or notices to owner, preliminary notices are sent by construction parties to inform key project stakeholders of who is working on a project. Prelims are some of the most important and underrated documents in the industry.
This notice also serves the purpose of protecting lien rights: most states require that lien claimants send preliminary in order to later file a valid mechanics lien. But remember, sending preliminary notice is a precaution, not a reaction. It must be sent before a problem arises. Notices are like low-cost insurance specifically designed for the construction industry.
Even if your state doesn’t require a preliminary notice, it is still effective to help you get paid on time. Standardizing your company’s process to provide preliminary notice at the beginning of every project will go a long way to reduce payment problems.
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8. Submit Detailed Pay Applications or Invoices
One of the easiest ways to get paid faster in construction is to submit payment applications or invoices on time and with as much detail as possible. Double check what your contract requires, and provide that as a minimum. Be an oversharer. Assume that the person receiving and reading your pay application has never heard of you or your company before. Which do you think is more likely to get an invoice paid: A single page requesting a $5,100 check for “labor and materials”? Or a 4-page document detailing 30 man-hours of window installation @ $120/hour and 3 windows @ $500 each, with photos and warranty sheets?
The bigger the pay application, the more important documentation becomes. The larger the payment, the more people will likely be reviewing it – the property owner, a lender, a surety underwriter, the insurance company, etc. You’ll need to convince each of them that you actually did the work you’re billing for. You might be able to get away with a single page invoice for $500. But that’ll never fly on a $500,000 pay app for a commercial HVAC install.
This is the moment when you’re proving your case about why you deserve to be paid. Provide detailed, line-item descriptions of the work you’ve done and the materials you’ve used. Include photo documentation, diagrams, warranties, and any other documentation that supports your application.
Use a pay application checklist to make sure you don’t leave anything out.
9. Send Lien Waivers
Unlike the other documents discussed here that protect lien rights, lien waivers waive (give up) lien rights. Lien waivers are often called lien releases as well. Payers request signed lien waivers from payees to protect themselves against double payment. The property owner doesn’t want to pay the GC only to have a subcontractor file a lien against them, so they often want to collect waivers from everyone on the job.
Sending lien waivers help construction businesses get paid on time, because they provide the property owner with assurance that you won’t file a claim against their property.
You may be asked to sign multiple lien waivers throughout a project (usually 1 waiver per payment). There are two main types of lien waivers: conditional waivers and unconditional waivers. Each can be used for either partial payments or final payments.
Conditional waivers and releases are contingent on payment, meaning they waive your lien rights for the listed amount once you get paid. Unconditional waivers are effective as soon as they’re signed, so they can be far more dangerous. If someone asks you to sign an unconditional waiver, make sure you have that money in the bank.
Be very careful about waiving lien rights before you actually receive payment.
10. Send Invoice Reminders
In a perfect world, a property owner or GC would automatically pay your invoice or pay application without needing to be asked again. But the people who review and pay your applications for payment are human. They make mistakes, forget dates, and are disorganized. Invoice reminders are an effective communication tool to help with getting paid on time. They help you cut through the clutter and make sure your invoice stays on the top of the payment pile.
Payment reminders work best between the time when you submit the invoice and when it’s due. Keep the tone light and friendly, and let them know that this is just a standard part of your process; they haven’t done anything wrong.
If your invoice is past due, it’s probably too late for a reminder. As with almost every other tool on this list, they should be used as part of a collection process. The more you can automate invoice reminders, the better. For example, a construction company whose payment terms are Net 30 might send an email reminder 14 days after invoicing, with an email, paper, and/or follow up with a phone call a week later.
11. Send a demand letter
A demand letter or Dunning letter is a more forceful type of invoice reminder sent after the payment is due.
An effective demand letter in construction hits three objectives. It:
- Lets the other person know how much they owe (including late payment penalties)
- References a policy or law that supports your right to take action
- Makes clear the next step(s) that you are going to take
The first objective is pretty clear. Don’t assume they already know how much they owe you; they probably don’t have your invoice sitting on their desk. Including the overdue balance directly in a demand letter makes it easy for them to cut you a check right then and there.
The second objective is to reference a policy or law that backs you up. This might be your company’s credit policy along with a federal or state law. This is important, because it shows them that you are organized and informed. You know your rights and can back them up in court, if you need to.
Using the law is especially effective with customers that are delaying your payment on purpose. There’s nothing that scares a bully more than a victim that knows how to use the law to their advantage. This is where you should reference your state’s mechanics lien law or prompt payment law. In some states, informing your customer about the prompt payment act is a necessary step before you’re allowed to make a claim for the interest penalty. Learn how to write a demand letter using prompt payment laws.
The third objective is to be clear about your next steps. Knowing your rights is only powerful if you are willing to take action to enforce them. For example, “We will file a mechanics lien on the property on June 12th unless the balance is paid in full.”
Some construction business owners worry about losing a customer by escalating a payment problem. If you’re afraid of sending a demand letter, it’s probably because you haven’t followed the previous steps. A demand letter works best as part of a credit policy that escalates the problem progressively.
Of course a customer is likely to get angry or defensive if they receive a demand letter that’s threatening a lien or other claim out of the blue. But if you’ve communicated your credit policy clearly from the beginning of the project, the customer won’t be surprised or offended – they can’t claim ignorance by that point.
Framing a demand letter (and subsequent actions) as part of your business credit policy sets a professional tone that removes personal egos from the situation.
12. Send Notice of Intent
A notice of intent to lien (NOI) is the final warning before a lien is filed. A notice of intent is really a specific type of demand letter that uses mechanics lien law as the teeth behind the bark. It gives the paying party one last chance to settle the bill before they face a mechanics lien.
In some states a notice of intent is required before filing a lien or bond claim. Even if an NOI is not required, it is an incredibly effective tool for collecting payment.
Parties making payment want to avoid being liened, and sending an NOI shows them you’re serious about getting paid for your construction work, while giving an opportunity to resolve the dispute. Deadlines vary in the states where NOIs are required, but the notice is typically sent after preliminary notice and a few weeks before a lien is filed.
13. File a mechanics lien (or bond claim)
The mechanics lien process starts well before payment problems arise. A mechanics lien is not a standalone document. In order to protect the ability to file a mechanics lien, a contractor must send specific notices ahead of time, often long before a mechanics lien enters the picture.
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Learn how Levelset can help you easily manage your lien rights on every project to ensure your payments are always protected.
Mechanics liens are the most effective collections remedy for unpaid contractors, suppliers, and other sub-tier contractors. Filing a mechanics lien turns the job site into collateral for the payment owed to the lien claimant. Therefore, filing a lien strongly motivates the liened party to resolve your payment issue. Deadlines vary by state, but generally a mechanics lien must be filed within a specified time frame from the last day labor and/or materials were provided.
Mechanics liens are only available on private residential or commercial projects in most states. On public projects, a payment bond will take the place of the property for the purpose of non-payment claims. If you’re unpaid on a government-run project, you’ll likely need to make a bond claim instead.
14. Enforce your lien or bond claim
Mechanics liens put significant pressure on the property owner to pay, but they don’t remain effective forever. Every state sets an expiration date for mechanics liens, which varies from 90 days to 3 years. You must enforce your lien claim before this deadline. Some states allow claimants to extend the deadline, which can be helpful if you’re in the middle of negotiations with the property owner.
Enforcing a lien claim generally requires filing a foreclosure lawsuit in civil court. This can be a long and expensive process, and you will want to solicit good legal advice. Fortunately, courts in many states award attorney fees and court costs to the prevailing party in a lien lawsuit. You can often recoup these costs after the decision.
The good news is that enforcing a lien claim is rarely necessary. The vast majority of mechanics lien claims are paid without the need for a lawsuit.
15. Enforce your contract
Enforcing a contract can be a powerful way to collect your payment, but it’s not as effective for construction companies as the other solutions on this list. If you’re having trouble getting paid on a job, jumping into contract litigation should almost never be the first step.
However, if you’ve exhausted all of your other legal options, or want to take every action to hold your hiring party’s feet to the fire, enforcing your contract is always on the table.
Similar to enforcing a lien claim, enforcing your contract requires a lawsuit. If you haven’t been paid for any or all of your work, you can file a breach of contract claim in civil court. This will typically require assistance from a construction attorney.
Getting paid in construction is a process: Start where you can.
All of these steps may seem like a lot, but don’t stress. If you can incorporate all of these steps into your payment process, you’ll see immediate results. But you don’t need to adopt every tool in order to see success.
If you take away one thing, it’s this: Protect your mechanics lien rights on every project. A mechanics lien process provides some of the most powerful tools you can use to get paid on time and in full. And the best part? By following the process, you will dramatically reduce payment disputes. Companies that send preliminary notice on every project – and send a notice of intent to lien when necessary – almost never have to actually file a mechanics lien. But if they need to, they know they have the option.
Discover how a Florida contractor’s average DSO went from 60 days to 14 days after sending notices on every job.
The fight to get paid what you earn can be one of the most frustrating parts of working in construction. It can make you feel desperate, overwhelmed, and powerless. All of these steps may seem like a lot, but once you incorporate them into a regular process, they’ll become second nature.
One day you’ll wonder how your construction company ever had problems getting paid.