Construction projects can be jumbled complex beasts with what seems like a million different moving parts. Oftentimes, this complexity leads to situations where you don’t know all of the other companies participating in the project. And unknown project participants only increases the chances of payment issues arising.
It’s a well-known fact that payment in the construction industry can be slower than desired for many reasons, and one way that parties attempt to mitigate payment risk is through providing preliminary notices. While a preliminary notice can be a prerequisite for preserving a company’s lien rights on a project, this is not necessarily the core purpose or function of the notice document. In fact, preliminary notices were originally developed for the benefit of property owners and upper-tier participants in order to provide visibility into the project and bring some of the potentially hidden project participants to light.
Because of this, property owners and GCs should love receiving preliminary notices. In this article, we’re going to list the top 5 reasons GCs, owners, and other upper-tier project participants should love receiving preliminary notices.
Table of Contents
1. Know Who’s On the Project
The first, and arguably most basic, benefit to receiving preliminary notice is that it provides specific information about parties on the project. And, depending on the complexity of the project, this might be the only way you ever know these parties were participants.
Think about this scenario: let’s say you’re the general contractor on a multi-family commercial residential building going up in a suburb of Dallas. How likely do you think it is that you’ll know who the materials supplier of one of the sub-subs to the electrical sub on the project is? I’d be willing to bet that they may not ever get on your radar, but this potentially hidden participant will be known to you by receiving a preliminary notice from them. If all of the lower-tiered project participants send you preliminary notices, you as the GC has the ability to fill out your project graph with the identities of each and every participant. And now, you’re the GC on a project with high visibility, and that has multiple benefits, some of which are discussed below.
2. Stop Payment Issues Before They Start
We all know that payment issues are all too common in construction. Whether the fault lies with the top or bottom of the chain is a case-by-case determination, but sometimes the issue isn’t with either the owner (or GC) or the party requesting to be paid. Sometimes the payment issue is just stuck somewhere in the middle.
If the top of chain parties have a fully-fleshed out map of who needs to get paid and know all of the project participants, they are more easily able to properly and appropriately manage payments – and follow-up where needed to make sure that payments are flowing smoothly. Managing payment efficiently, and smoking out potential problems before they grow into big problems is made much easier if you know who everybody is.
3. Know from Whom Lien Waivers Should be Collected
Related to the above two points is the issue of lien waivers. You obviously want to keep your property and project free of lien claims – whether or not the claim is justified. One of the best and most efficient ways to do that is to collect lien waivers.
A lien waiver is a “receipt” document waiving the right to file a lien with regard to a certain payment/timeframe. The problem with relying on lien waivers to protect the project from liens, though, is that lien waivers are generally only effective with regard to the parties from whom they are collected. A party could collect 10 lien waivers, but if there are 11 project participants, the threat of a lien still exists if the 11th party doesn’t get paid.
If preliminary notices are received, and the information regarding the participants is put on your project graph, you have a handy pre-made checklist of the parties from whom you need to collect lien waivers to make sure the property and project remain lien free.
4. Know You’re Doing Business with Companies that Run a Tight Ship
Sending preliminary notices on every project is a sign of a company that has it’s processes and procedures in place, understands the value of visibility, is sophisticated and runs a tight ship. And when you’re the GC or owner, these are all good things.
It’s much easier to do business with organized, efficient, well-run companies that know what’s expected of them and are able to get er’ done. The same goes for construction projects, if an issue going to arise (with completing a pay-app, meeting a deadline, or anything else) which party do you think is going to falter – the one that makes sure you have all the information you need and that they have protected their potential rights to payment immediately at the start of the project – or the person who lets the preliminary notice requirement deadline slip by. Forrest Gump liked to say, ‘stupid is as stupid does,’ but you could say the same thing about well-organized, well-run companies. You know ‘em when you see ‘em, and working with companies like them makes everything on a project go a little bit smoother.
5. Opens a Line of Communication
It’s truly unfortunate that preliminary notices are thought of as anything other than a proactive, good-faith initiative because really, the participants that send preliminary notice are doing you a favor by letting you know they are there. And, by doing so, they are opening up a line of communication if it is needed.
Preliminary notice documents not only let you know the name of the participants, but also who hired them, their address, and more. How many times have you heard of a GC on a project getting a “surprise lien claim” from a company that they didn’t know was on the project and maybe had never even heard of. (Something like we describe in section #1 above – it’s easy to imagine that GC in that scenario having no idea who the sub-sub’s material supplier is).
Communication is a good thing, and any document that opens up communication where it otherwise wouldn’t exist is good, too. Opening up different channels of communication into the project chain can help avoid problems, or just keep you more in touch with what’s happening on the project.