As someone responsible for getting money in and out of the door you’re intimately familiar with the hassles of the construction payment process. All of the hassles and inconveniences come right at you – each and every month, sucking away your time as you fumble around with your accounting software, spreadsheets, emails, and more. There’s one interesting and frequently overlooked document that does an out-sized job at improving the payment process for everyone involved: the preliminary notice.
Yes, really, the preliminary notice.
Identifying The Underlying Pains and Hassles in the Payment Process
Everyone in the construction space knows that the payment process is messy and convoluted. Not only is the paperwork and associated tasks full of hassles, but those managing payments coming in and/or going out of the door also find themselves juggling relationships. You’re calling this person and that person asking about payment timing, confirming compliance information … it never ends. The following are just a few of the many headaches:
- Payment Applications & Complex Schedule of Payment calculations
- Nuanced payment terms in the construction contract with retainage rules, pay-when-paid or pay-if-paid clauses
- Lien waiver exchanges
- Joint check agreements and requests
- Figuring out how much work was done when compared with representations
- Tracking down payments from the various parties
- Multiple payment technological interfaces
- Determining all of the essential project information, including the identity of all other project stakeholders
So, what’s the underlying pain here? What’s really going on that is making all this stuff so complicated? One underlying issue connected to all of these headaches is knowing exactly who the other stakeholders are and how to reach them!
This sounds pretty simple, but lets look at the headaches again.
Let’s look at lien waiver exchanges. If you’re a general contractor, do you know who the sub-tier subs, suppliers, and equipment companies are? If you’re a subcontractor or supplier, does the general contractor know exactly how to get a lien waiver from you? There’s a lot of headache here, with significant time wasted on just tracking down how to get the waivers exchanged between the right parties.
Tracking down the payment? Do you know who to call? For subcontractors and suppliers, do you even know where the money is coming from, or who your customers’ customer is waiting on? For general contractors, you’re interested in making sure the payments trickle down the chain, but do you know who they need to trickle down to?
Parties can’t resolve payment risks and problems with joint checks if they don’t know all the parties. Compliance tracking can’t happen if you don’t know all the parties. Getting folks to submit their payment application in a certain way can’t happen if you don’t know all the parties.
Construction projects are complicated affairs with layers and layers of stakeholders. Getting payments to work through all the stakeholders is challenging because of all the layers…and the reason why that is challenging is because some of layers are blind to other layers.
And that is why the preliminary notice can be magical!
Preliminary Notices Make Payments Easier For Everyone
Have you heard of the preliminary notice? It’s likely you have because at some time or another on a prior construction project, you’ve probably sent or received one. The documents are fairly uninteresting at first glance, and while people have varying opinions about them (see 3 Myths of Preliminary Notices), they are pretty mundane little documents. They simply provide pretty basic information.
That basic information, however, is really, really valuable. Let me repeat that: that information is really, really valuable.
In fact, the preliminary notice contains the very information that could cure most of your payment process headaches.
Let’s say you’re in charge of making payments as a general contractor or developer. Wouldn’t it be swell if someone gave you the identity of the subcontractors’ suppliers, and told you exactly where and how to request lien waivers from them? Wouldn’t it be great if you had the exact contact information of the folks who would file a lien on your project if they weren’t paid? That’s precisely the information contained on that preliminary notice.
Now, let’s say you’re in charge of collecting payment as a contractor or supplier. Wouldn’t it be great if, instead of having to chase around the subcontractor or general contractor when payment was being issued, the paying party had direct access to you and could settle up all the paperwork logistics (i.e. waivers) that slow down your payment? Well, that’s precisely the help the preliminary notice can provide.
Unfortunately, too many preliminary notices go unsent, and too many sent preliminary notices get lost in the shuffle of paperwork. But for the business owners, office managers, and accounting professionals who’s job it is to make the payment process work, embracing the sending and receiving of preliminary notices can go a long way to making your complex system of payments easy.