Restoration Contractors

Restoration contractors regularly do work for one party and get paid by another. For example, a contractor may be hired by a homeowner to do remediation, restoration, or mitigation work in order to fix some disaster that may have occurred such as flooding or mold removal. However, the homeowner may in actuality be receiving a check to cover the funds from an insurance company. This setup makes perfect logical sense, but it can create drag when trying to get paid for the work being performed.

Restoration contractors face unique payment hurdles

When there are additional parties added into the mix (here, the insurer), payments to restoration contractors get slowed down. Commonly, insurance carriers drag their feet in getting payment out. On top of that, a contractor may be reliant on the homeowner to pass the funds down directly.

If that’s the case, it’s extremely common for a property owner to be reluctant to pass along funds. By this time, the restoration work may already be finished, and the contractor may have moved onto more work creating the same cycle over again. All the while, payment hangs in limbo.

That can create a serious cash flow problem. As a result, it’s not that uncommon for restoration contractors to rely on making angry phone calls for payment, or in a worst-case scenario, even turning to collections. So how can restoration contractors ensure that payment is promptly made?

For a Deep Dive on the Problem:

How Restoration Contractors Can Reduce Stress and Boost Cash Flow

Here at Levelset, we know that restoration contractors are proud of the work they perform. We also know that many restoration contractors either own a franchise of these organizations or may work under part of a larger network. Simply put, non-payment is a painful issue that can deeply impact a business, and no one wants their business to fail because of a lack of cash. These contractors, networks, and related businesses can rest easier when cash flow worries can be put on the back burner.

Below, you can find five proven methods for boosting cash flow for restoration contractors – be that for one business, or a larger network.

1. Communicate with All Parties, Avoiding Disputes in the First Place

It sounds easy, but many restoration contractors are surprised by the lack of collaboration and communication on a given project. This can leave them in the dark and guessing about where payment is on the project. Did the insurer already pay the property owner? Will they be paying me directly? When communication is sent up the chain from the start of the job and is made to everyone involved (i.e. the owner, the insurer, the project manager, etc.), it’s less likely that payment issues will occur. It’s an even better idea to send both paper and electronic copies of documents (the latter of which could help to speed up payment). We’ve seen that contractors that send documents on the front end, get paid 98% of the time without further issues.

2. Protect Your Rights from Day 1 (But Only Use Them If Necessary)

By communicating early and often (via documents like a preliminary notice or a project awareness letter), disputes can be avoided. But these documents can also serve a secondary purpose – particularly, preliminary notices. Every state has mechanics lien laws on the books, allowing contractors, subs, and suppliers to file mechanics liens to recover payment if push comes to shove. However, in order to preserve these rights, certain notices may be necessary. So, preserving the right to utilize construction’s most powerful payment recovery tool, the mechanic’s lien, starts from day 1 of the project – and in some cases, earlier than that. By sending the required documentation to preserve lien rights, restoration contractors benefit from the communication described above while also preserving their lien rights. That’s a win-win.

Two helpful resources:

1. Interactive Map: Preliminary Notice Requirements in all 50 States

2. How Do Mechanics Liens Work? 17 Ways a Lien Gets You Paid

3. Track Delinquent Customers

In order to make sure that you get cash in the door and don’t have to chase down payment, have a good system for tracking delinquent invoices. Typically, restoration contractors might send an invoice out from an account system like Quickbooks or Sage once certain phases of the project are complete. It’s also a good idea for a contractor to send a lien waiver and a pay application along with the invoice to help show the other parties of a request for payment.

4. Use the Secret Weapon – a Notice of Intent to Lien

We discussed preserving lien rights above, and also noted that they should be a last resort. It’s true, mechanics liens are the nuclear option. Nobody ever wants an issue to get that far. However, beyond merely preserving lien rights, there’s another way to make sure these rights work for you – without actually having to resort to a lien filing. We’re talking about flexing the leverage that a lien provides by warning (or even threatening) that a lien filing will take place if payment isn’t made.

Because a Notice of Intent to Lien is rarely required, many restoration contractors aren’t aware of this secret weapon. But, by warning the property owner, their insurer, and the project manager (if one is present) that a lien filing may be on the horizon, they’ll be “encouraged” to resolve any payment disputes. At the end of the day, they’ll be happy to avoid a lien claim, and contractors almost always prefer it that way too.

5. When Push Comes to Shove, Utilize the Tools Available

Ideally, it will never come to this. But, when push comes to shove, restoration contractors should be ready to utilize the tools available for securing payment for their work. As mentioned above, filing a mechanics lien is a strong payment recovery tool. Plus, believe it or not, they actually help to avoid payment recovery litigation. But, there are other tools available for recovery, too.

For one, leveraging potential legal claims (like leveraging the right to lien, as described above) can go a long way. When payment isn’t made, claims such as a breach of contract claim, unjust enrichment claim, or even a claim under prompt payment or retainage laws might be available. Merely threatening to use those tools could be enough to compel payment – but, if need be, restoration contractors should be prepared to use them, or at least understand what each route entails.

But again, talking out the dispute, leveraging lien rights, and even filing a mechanics lien claim are typically preferable to diving into the dangerous (and expensive!) waters of litigation.

Video: Why Are Lien Rights Important for Restoration Contractors?

Why Every Restoration Contractor Needs Lien Rights Management

Lien rights management will help achieve each goal listed above. By sending notices early, healthy communication is established on the job. This transparency and collaborative atmosphere helps prevent disputes in the first place. Of course, sometimes, payment problems will still happen.

In those cases, when the proper notices have been sent, it’s easier to escalate the matter. When a customer knows that lien rights have been properly preserved and then receives a Notice of Intent to Lien, they’ll know you mean business – and they’ll want to avoid fighting off a lien.

Finally, if the mechanic’s lien management process has been tightly followed, and a lien claim does ultimately become necessary, restoration contractors can be confident when it’s time to file their mechanics lien and fight for payment.

Construction Cash Flow is a Serious Issue:

Construction Companies Have a Cash Flow Problem, and Everyone (Even Employees) Is Paying the Price

Every construction business faces cash flow problems, and every trade and specialty has its own unique twists, exacerbating the issue. With that in mind, here are the top 3 reasons why lien rights management is crucial for restoration contractors.

Holding Insurers Accountable

It’s easy to sympathize with an owner who can’t pay until the insurance check is released. That can be a problem since it’s common for insurers to want to double or even triple check the work before releasing payment. But just because the insurance company has the funding doesn’t mean they’re holding all the cards.

A restoration contractors’ ability to file a lien can light a fire under an insurer to release payments to the restoration contractor (or to their policy holder) in order to avoid the messy battle that comes with mechanics lien filings. Even where the insurer isn’t threatened by the lien themselves, an irate homeowner will only have the insurance company to blame for the lien. Leveraging mechanics lien claims can ensure that an insurance company dragging their feet won’t compromise the ability to get paid.

The principles we discussed above still apply: When these parties know the right to lien has been preserved, and when a warning has been made, payment is usually made before a lien filing becomes necessary. 

Communicating With Property Owners and Other Stakeholders

Restoration contractors’ payment problems don’t always stem from insurers, though. Property owners can cause payment disputes all by themselves. 

By maintaining constant communication with the property owner and other project stakeholders (like the insurance company), a restoration contractor can avoid owners diverting funds for other priorities, or worse yet, pocketing some of the insurance money earmarked for the contractor.

One of the ways to get ahead of this process is to send invoices as often as possible and send conditional lien waivers alongside them. That way, everyone (including the insurer) will know what work has been performed and what’s owed for that work.

Plus, conditional lien waivers promote fair payment practices on both sides – contractors’ rights aren’t waived until payment is made, but also, owners and insurers know that once payment is made, lien rights are no longer a liability.

Speeding Up Payment

The most important issue for any business, and in particular, any restoration business is cash flow. When surveyed, 17% of construction companies said cash flow affects payroll, and for 25% of companies, that means employees don’t get paid.

Adding the red tape of the insurance industry, restoration contractors are particularly susceptible to problems created by slow payment. In fact, some restoration contractors may wait months for payment or may not receive payment at all and need to write off the losses or take cents on the dollar for work performed. In addition to making sure that restoration owners can meet payroll, companies that experience slow payment may have issues taking on new projects and growing the business.

By incorporating lien rights management, restoration contractors can speed up payments and, if need be, confidently force the issue and get paid on time.

The Bottom Line

Construction companies shouldn’t have to fight tooth and nail to get paid what they’re owed. This is doubly true for restoration contractors. Often, they’re right behind first responders – ready and able to rebuild communities after a disaster. While part of the satisfactorily for restoration contractors comes from putting the pieces back together for property owners and communities at large, in order to keep these restoration businesses running, payments must be made (and made on time). By incorporating good lien rights management practices, restoration contractors can improve cash flow, reduce stress, and actually reduce the need for actions like filing a lien.

How Restoration Contractors Can Boost Cash Flow and Reduce Stress
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How Restoration Contractors Can Boost Cash Flow and Reduce Stress
Every construction company faces obstacles to payment, but restoration contractors face unique hurdles. Here's how to reduce stress and boost cash flow...
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