Sending a preliminary notice at the start of every job is one of the easiest ways to gain peace of mind about payment. It’s a quick and easy way to secure your mechanics lien rights, and to get yourself noticed on a project. The usefulness of prelims can’t be overstated. This is particularly true when working on a project where everyone else is sending them.
Importance of preliminary notices
If they are required (and they are in most states!), then sending one on every job is a no-brainer. Depending on where your project is located, these can have a number of different names: Florida calls them a Notice to Owners, California and Arizona both call them 20-Day Preliminary Notices, and some states don’t even have an established name for them – we’re looking at you Texas “monthly notices!”
To add to the confusion, a lot of contractors and subs refer to these notices simply as “pre-liens,” but we don’t like that term. It seems to indicate that the notice is somehow combative, or that a lien will be filed. Because preliminary notices do so much more than preserve the ability to file a lien later, “pre-lien” just doesn’t do them justice.
But, no matter what you call them, preliminary notices are one of the simplest, most powerful tools in your construction payment arsenal.
Contrary to popular belief, owners actually like receiving preliminary notices
Many owners and contractors like receiving notices – and the ones that don’t, should.
One common myth that we should finally put to rest is that preliminary notices are aggressive and confrontational. The reality is, it’s the exact opposite – they promote communication and collaboration on the job! Subs and suppliers aren’t the only parties that have some financial risk invested in the project; higher-tier parties also do. One of the main concerns for construction projects is the potential of having a mechanics lien filed on the property.
In order to combat that, owners and GCs must ensure that everyone on the project gets paid. The problem is, the larger the scope of the project, the longer the payment chain stretches out. It can be nearly impossible to know everyone who is working on the project and the services they are providing. By receiving a preliminary notice, higher-tier parties become aware of your presence. This means they will take more active steps to assure that you are paid to avoid being surprised later on with “hidden liens.”
Preliminary notices are important, even if they aren’t required:
Prelims are more important if others are sending them
So you’ve landed a new contract, and are beginning work on the project. Maybe you decided not to send a prelim. As the other trades start rolling onto the job site, you realize that others on the project have already begun to send theirs. This should be a call to action. We’ve mentioned how important preliminary notices are, but it is especially important if other people are sending them on the job.
People who send notices get their invoices paid faster
One major benefit of sending preliminary notices is faster payment. As mentioned above, when an owner or GC receives a preliminary notice, that signals to them that you are on the project and what services or materials you are providing. But that’s not all; those who send notices on a project are also given a sort of “priority” of payment.
Think about it, the number of invoices and pay applications that get sent back and forth on a project can be dizzying. There needs to be some way to “tag” your invoice as important or urgent. That’s essentially what a preliminary notice does.
The simple act of sending this document is a sign that you run a tight ship, know your rights, and are serious about getting paid. This separates your invoices from the rest of the pack immediately. So if there are multiple parties sending prelims on the project, that stack of “priority invoices” grows taller and taller. The longer you wait, the more competition you’ll have to receive payment.
Hear it from a subcontractor just like you:
Project failure could leave you high and dry
Let’s say you’ve been working for a few months on a contract, but the project eventually goes south. This certainly isn’t a far-fetched concept. In fact, construction projects fail all the time due to things like cost overruns, multiple delays, or simply poor project management. At this point, the well has run dry, and everyone on the project is scrambling to get paid.
When an owner or GC goes bankrupt, everyone is looking for a piece of the pie. One of the biggest determining factors regarding for recovery of payments is whether the debt is secured or unsecured. Mechanics liens are one type of secured debt, as the debt is “secured” by the actual property.
Keep in mind, as a subcontractor; there are several states that require a preliminary notice to file a mechanics lien. By sending notice and preserving the right to lien, construction businesses can put themselves in the best possible position, given the circumstances.
For more bankruptcy talk:
Preliminary are incredibly effective at promoting visibility and securing your rights to payment. And, as you can see, they are significantly more important when others on the same job are sending them. The whole point is to be acknowledged on a project, so the more notices that are sent on the project, the harder it is to get your voice heard without it.