Preliminary notices are routinely required on construction projects. In fact, a majority of states require some sort of preliminary notice in order to maintain lien rights.
But even when a preliminary notice is not required, there are still numerous and substantial benefits to sending them on your projects. Providing visibility (as well as informing your fellow project participants of the fact that you remain in a secured position with regard to your lien rights) results in the prioritization of your invoices / pay-apps and thus, in fewer liens being required in order to get paid.
The heart of the matter is that sending preliminary notice gets companies paid more often, and paid faster.
Getting Preliminary Notice is Good for the Owner
One of the most common reasons construction participant give for not sending preliminary notice is that they don’t want to “rock the boat” or cause tension in their business relationships. While this idea is understandable, it’s not a wise business decision, and truthfully, it’s not even true. The reality of the construction industry is that companies expect to get preliminary notices, and in many cases want to receive them. Here’s why.
While the mechanics lien instrument was created for the benefit of those furnishing labor and/or material to a construction project as a protection against nonpayment, preliminary notices were actually developed for the owner. Preliminary notice requirements provide information to the parties in control of the money (we call them the “upper-tiered parties” – owners, GCs, occasionally lending institutions or sureties) and protect these parties and the overall project against “hidden” liens.
Construction payment issues are not limited to the parties who need to get paid – the parties making payment have their own payment struggles, risks, and difficulties. One of the chief difficulties for the paying parties is the lack of visibility on construction projects, and the associated risk of liens from unknown parties – the so-called “hidden” lien we introduced above.
Construction projects can be large, convoluted, complicated projects with an enormous number of parties. GCs hire subs, who hire sub-subs, who hire suppliers who are way down the payment chain and far-removed from the parties with the money. This can be a problem for the owner and GC who are charged controlling the flow of payment on the project. It’s tough to make sure a supplier is paid if the GC has no idea who that particular supplier is, or that he or she was even on the project.
This is the primary benefit of the preliminary notice. By sending notice to the top-of-chain parties, lower-tiered party can create their own visibility, and proactively put themselves in the best position for payment.
Why Does This Result in Fewer Lien Claims
The visibility provided by preliminary notice means faster payment and less payment issues.
Tracking the receipt of preliminary notices is a function that upper-tiered companies undertake to manage their financial risk. When required preliminary notices are sent, the noticing party remains in a secured position, able to file a lien or make a bond claim in the event of nonpayment.
This means that parties who provide preliminary notices have their invoices or pay-apps prioritized over parties that don’t. Who do you think gets paid faster in the event of some hiccup with the money: a party who has retained lien rights and can collect through the property itself, or a party who has no lien rights? The answer is simple – companies that have secured their lien rights get paid first.
The prioritization of invoices and the visibility provided by sending preliminary notice means companies get paid, and get paid quicker. This, in turn, means that fewer lien claims are required in order prompt tardy payment. Sending preliminary notices, then, is just like having an inexpensive insurance policy, and a good business practice for every construction industry participant.