If another contractor on your job is having trouble getting paid, it’s a bad sign. Payment issues on a construction project often affect more than one company, so spotting these red flags early on gives you time to take steps to prevent the payment problems from impacting you.
This article will cover common red flags, then will address what you should do if you spot a red flag on one of your jobs. We’ll also cover best practices for how you can avoid payment problems and put yourself in the best position to get paid from the start of any job.
Common payment red flags and what they mean
Another contractor files a lien
Mechanics liens are serious. If another contractor files a lien, it means they are having major issues getting paid, and they may have been waiting for payment for weeks or even months. (On public jobs, look out for bond claims instead of liens.) At worst, a lien is a sign of serious cash flow issues on the job, which could put you at risk of non-payment. At best, a lien is a sign that parties on a job aren’t communicating and that cash is not flowing smoothly.
Another contractor sends a notice of intent
A notice of intent to lien (or “NOI”) is a warning letter that is sent to give the GC, hiring party, and property owner a heads up that the sender hasn’t been paid, and will file a lien if payment isn’t made quickly. If an NOI is sent on a job your company is working on, it’s not as serious as a lien, but it means that another contractor’s payment is late. If one company isn’t getting paid, it’s a sign that other payments might be at risk too.
Another contractor sends a monthly notice (in Texas)
If someone sends a Texas monthly notice (also called a “Fund Trapping” notice), it means they haven’t been paid. Again, if one party on a job is having trouble getting paid, it’s a sign of issues on the job. Another reason to keep up with Texas monthly notices and requirements is because they’re essential to securing lien rights. Check which requirements apply to you.
The GC is having payment problems on another job
This one is pretty straightforward. If a general contractor is having trouble paying subs and vendors on one job, the same cash constraints apply to other jobs. If they’re tight on cash, it’s likely payment delays will affect their subs, and therefore also affect sub-subs and suppliers down the chain.
What to do if you spot a red flag on one of your jobs
If you just started work
The closer you are to starting work on a job, the more options you have. It’s always a good idea to send a preliminary notice (sometimes called a ‘Notice to Owner,’ ‘prelien,’ or ‘prelim’). Most states require that contractors and suppliers send this kind of notice close to the start of work in order to secure lien rights, which are a powerful tool to leverage if you run into a payment issue down the line. Check if you have preliminary notice requirements, but know that sending a preliminary notice is valuable even when it’s not required.
If you’re well into work
Sending payment reminders is a great way to keep your invoices top of mind. Many companies opt to send a friendly reminder to their customer and/or the GC a few days before an invoice is due, and a second reminder a few days after. If you’re worrying about your late payment, you can make your reminder less friendly – like a demand letter. Staying on top of outstanding invoices makes you look professional and prompts payment without disrupting relationships. It’s also a great option if you missed your notice deadline or are working on a longer job with lots of invoices.
If the job is over
If you’ve finished work on a job and still haven’t been paid in full, consider sending a more serious reminder like a notice of intent to lien (aka “NOI”). Some states require that contractors send an NOI before filing a lien, but usually contractors send them voluntarily. NOIs are really effective at getting the payment ball rolling because they get the GC and property owner’s attention – nobody wants a lien filed on a job. If you send an NOI and still don’t get paid, or if your lien deadline is approaching, it might be time to skip straight to filing a lien.
If you’re finished and all paid up
Congrats! You narrowly avoided a sticky situation. Check the next section to learn what you can do on future jobs to confidently secure your payments.
How to prevent payment issues on future jobs
Communication is key
Keeping everyone in the loop about the work you’re doing, the amount you’re owed, and when you expect to be paid is the best way to ensure smooth payments and successful jobs. This is what lien rights are all about. Contractors are typically required to send notices to their customer, the GC, and the property owner in order to secure lien rights, and the point of this paperwork is to keep the recipients informed about the contractor’s work. When starting a job, it’s best practice to send a preliminary notice, and to stay in communication throughout the job with payment reminders.
Check your customers’ payment history
It’s always good to know what to expect, especially when you’re stepping out of your comfort zone to work with a new GC. Many companies run credit checks on potential customers before signing contracts, or look to see if the GC has a history of liens and other payment issues. Search contractor payment profiles to see other contractors’ experience working for a GC and to see recent payment risks.
Look out for red flags
Often, it’s really hard to learn that a lien has been filed on a job unless you’re the person filing it or you’re the GC receiving it. That’s why Levelset sends payment alerts to let contractors know if we identify a payment issue on a job they’re working. Keep an eye out for emails from Levelset alerting you to liens, NOIs, monthly notices, and other red flags on your jobs so you can take action to secure payment before it’s too late.