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We talk to construction companies every day here at Levelset, and when we ask these companies about their lien rights management process, it’s not uncommon to hear some version of this statement as to their answer: “We only send preliminary notices on our problem projects.”
Some companies choose to only protect lien rights by filing preliminary notices on what they deem to be ‘problem jobs,’ and they never send notices on any other project outside of this category. In this article, we’ll uncover why this practice is a bad idea and recommended a few ways for you to protect more of your company’s incoming payments.
What Makes a Job a ‘Problem’ Job?
Whenever a construction company tells us that they only send notices ‘on problem jobs,’ we’re immediately prompted to follow up with: “if you only send notices on ‘problem jobs,’ how do you know which ones are problem jobs, and which are not?”
Not surprisingly, what we’ve found in our experience is that everyone defines ‘problem jobs’ a little bit differently. And while the ‘problem job’ criteria vary widely, there are a few ‘problem job’ traits that seem to come up more often than others:
- Doing business with a new customer for the first time, with no direct knowledge of their payment history, financial stability and solvency. This category also includes doing business with a new customer that has a (bad) reputation for having payment, cash flow, or other financial problems in the past.
- Doing business with an established customer that has been slow to pay their invoices on other projects in the past (this is the tried and true, “fool me once, shame on me, fool me twice…” scenario
- Extending credit or payment terms to customers (either new or established) with poor credit ratings or credit history, bad or incomplete credit references, etc
- High dollar jobs where a payment problem could potentially be financially disastrous
Good Jobs Are “Good,” Until They’re Not
Although, it is a good idea to build a strategy behind your lien and notice policy, that does not mean you should ignore an entire segment of your business: your good jobs. But if your company doesn’t send notices on their “good jobs,” then you’re not alone, because that’s the way many construction companies choose to manage their lien rights.
Sending preliminary notices is not meant to be adversarial or a punishment reserved for “bad” customers on “bad” projects. It’s just smart business. While no one would ever want to do business with a “bad” customer on a “bad” job, the reality is that often “good” projects become “bad” projects unexpectedly. And that’s often when your company has the biggest potential to be adversely impacted, when the “bad” project takes you by surprise, catching you with your guard down and exposed to payment risk.
In our experience, we have seen far too many construction companies just like yours scrambling to secure their lien rights on a project when a previously “rock solid” customer or project had an unexpected setback, slowing the flow of payments on the project, or in a worst case scenario, blocking or preventing payments from flowing entirely. Many times, it’s not necessarily even your customer that has a setback, but rather, another project participant entirely that runs into problems on the job, causing a ripple effect that impacts most or all of the other companies.
Unfortunately, many of these companies find out too late that their lien rights on the project have already expired or were never secured to begin with because they failed to send a preliminary notice. Full protection on all jobs, regardless of they’re considered to be “good” jobs or “bad” jobs, will eliminate this risk.
What You Should Say When Your Customer Asks,
“Why Are You Sending a Preliminary Notice to Me?”
Your Customer: [in an annoyed tone of voice] Why did you send me this preliminary notice? What gives?
You: [in a calm, pleasant voice] It’s our policy to send notices every time so that we can effectively secure all of our incoming payments on all of our projects, across the board.
Your Customer: [still annoyed] Yeah, but, we’ve always paid our invoices. We might have been late once or twice, but you guys always got your money! Are you trying to say that we’ve got money problems?
You: [still pleasant, you’re going to kill them with kindness!] Think of it this way: you are about to give me a ride somewhere in your car. The first thing I do after I get in is to fasten my seat belt. Is putting my seat belt on just a way of saying that I think you’re a bad driver?
Your Customer: [less annoyed now] Well, no, not really. You’re just being safe and smart.
You: Exactly. So, try to think of this project we’re working on together as the same thing as taking us taking a ride with you in your car. Sending you notices on the project is exactly like putting on my seat belt in your car. We expect everything to be perfectly fine on this project, just like we would expect to arrive safely whenever we got in your car with you. But of course we’re going to be smart and protect ourselves. We’d be silly not to.
Your Customer: [no longer annoyed] Okay, that makes sense. I get it!
The Business Case for Sending Notices on ALL of Your Jobs: Eliminate Payment Risk & Increase Visibility
Even though these documents may directly relate to lien rights management process, sending notices has other benefits for construction companies, over and above lien rights management alone. In addition to eliminating risk as described above, sending preliminary notices is a great way to promote visibility and collaboration for all project participants. The project stakeholders higher up the payment chain (such as the owner or general contractor) that are making the payments are more likely to prioritize your payment over other companies involved on the project because you have secured your lien rights while the others may have not.
Additionally, sending preliminary notices will greatly streamline your lien rights management process by removing the case-by-case decision making work out of the process entirely. In other words, it’s much easier to just send a notice every time instead of having to figure out when and if to send notices on a project-by-project basis.
Last but not least, in some states sending preliminary notices is required step in the lien rights process. This is true in California, Oregon, and Florida which generally require contractors and suppliers to send notices at the start of every project.
Extra Reading: Why You Should Send Preliminary Notice Even When It’s Not Required | Levelset
To wrap it up, it’s very easy to over complicate your lien and notice policy, “reinventing the wheel” on every project by deciding whether or not you’re going to manage your lien rights on a case-by-case basis. The much better policy is to secure your payments on every job across the board, because being protected in every case is better business than being protecting only some of the time.