It’s a well-known fact that payment in the construction industry can be slower than desired for many reasons. 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. As it turns out, preliminary notices are actually an advantage for property owners, GCs, and sub-tier parties alike.
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Financial Risk in Construction is High
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.
Everyone in construction wants to shift financial risk away from themselves. Unfortunately, that means someone else has to bear the risk. Property owners and GCs often have trouble identifying everyone on a project, verifying the quality of their work, and processing pay applications. They fear putting themselves at risk of paying for work that wasn’t up to par. If they don’t manage payments well, they’re also at risk of paying twice for the same work.
As a result, they often shift the risk down to the lower-tier parties, by withholding payment for as long as possible. In turn, subcontractors and suppliers are at risk of non-payment.
This risk-shifting struggle (we’ll have the issue of whether this serves any beneficial purpose) is grounded in two fundamental facts:
- There is always some financial risk on a project
- Nobody wants to bear that financial risk
Fortunately, there’s one simple document that can solve many of the problems that everyone on a project is concerned about: the preliminary notice. Parties who embrace this notice, and encourage its use, don’t have to choose between risk-shifting tactics that are so common in the construction payment process.
Preliminary Notices Benefit Everybody
When it comes to payment, everyone on a construction project has the same goal in mind: They want payments to work fairly and happen on time. Everyone wants to avoid payment disputes that could derail the project or freeze the property.
Parties at the top of the payment chain are interested in fair payment structures just like the parties at the bottom of the chain. The worry for GCs and property owners is not that they will be required to pay the amounts that they are expecting to pay. GCs and owners worry that they will be required to pay twice because of “hidden” liens. Or that a project will be derailed or encounter difficulties due to a lien being filed on the project when they had no control in preventing it.
Top 5 Reasons Why Owners & GCs Should Love Preliminary Notices
Because of this, it’s actually a huge advantage for property owners and GCs when subcontractors and suppliers send preliminary notices. In this article, we’ll look at the top 5 reasons why preliminary notice is great for GCs, property owners, and others in charge of a construction project.
1. Preliminary notices help a GC identify everyone 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 if you receive a preliminary notice from them. If all of the lower-tiered project participants send you preliminary notices, 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. Prelims help property owners avoid payment problems 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 much easier if you know who everybody is.
3. The help the GC collect lien waivers easily
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. GCs know they’re doing business with a company that runs a tight ship
Sending preliminary notices on every project is a sign of a company that has its 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 is 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? 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. Prelims open the lines 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.