I work with a lot of subcontractors who never send preliminary notices (I call them prelims). Of course, these subs always give me a reason why they don’t use prelims. They trust the GC to pay. The process is confusing. It’s a waste of time and money. The crazy thing is that you ask a room full of subcontractors what they hate most about their jobs, you’ll probably hear them chant in unison, “Trying to get paid!” Here are some of the most common arguments that subcontractors give me about why they don’t send prelims – and why they’re all wrong.
Subcontractors get paid late, but don’t send prelims
Late payments have become the norm for contractors. But why? Part of the problem is the basic nature of the construction industry. Contractors spend money on materials and labor expenses up front, and then wait to get paid for those expenses, plus a little profit, at the end of the following month. Another part of the problem is that we allow our customers to get away with it. Over and over and over.
According to the 2020 Construction Payment Report, only 52% of construction businesses get paid in full – that’s a 9% drop from the 2019 report. To make matters worse, only 26% of survey respondents say that they get paid on time. That means nearly 3 out of 4 contractors are regularly getting paid late. Slow and partial payments have a profound impact on a contractor’s cash-flow. It’s challenging to start a new project while you’re still fighting to get paid on the last project you completed.
Prelims speed up the payment process
All states have a mechanics lien process to ensure that contractors get paid promptly for the materials and work they provide. Sending preliminary notice is usually the first step of that process. The problem is, many contractors don’t follow the process. They don’t bother to protect their lien rights. In fact, only 11% of the survey respondents say they prelim every single project.
Discover how a Florida contractor’s average DSO went from 60 days to 14 days after sending notices on every job.
Nearly 90% of the surveyed contractors are willing to gamble on whether they get paid on time or paid in full. They are also losing fast-pay discounts, and risk incurring late fees on other accounts due to these consistently slow and missing payments.
Why subcontractors don’t send prelims
So why are so many contractors NOT filing prelims on every job? Let’s ask our room full of subcontractors, and see what they say.
“I trust the General Contractor.”
Many subcontractors who don’t file prelims say that they trust the generals that contract with them. Their arguments go something like this:
“They have a good work history.”
“I have always gotten paid before. Eventually.”
“That contractor has a good reputation.”
And if your monthly invoices get paid in full, and pretty much on time, congratulations! That’s exactly how the payment process is supposed to work.
But even if that’s the case every single time, these subcontractors are forgetting all of the other benefits that preliminary notices provide on a project. The irony is that most GCs will probably trust you more if you sent prelims.
Trust only gets you so far. Unfortunately, the GC isn’t the only one who controls whether or not you get paid. What happens when your “trusted GC” gets stiffed by the owner or lender? When subcontractors trust the GC or property owner’s promises they can wind up getting stiffed.
Project funding can have a lot of moving parts.
- Multiple property owners
- Major (anchor) tenants
If the GC doesn’t get paid, then chances are, your company won’t get paid either. In a situation like this, that prelim notice allows you to get paid for your completed work.
“The prelim process is confusing.”
Another reason subcontractors don’t use prelims is because they don’t know or understand the preliminary notice requirements for their state or work area. Most states require that to file a lien, the contractor must send a preliminary notice or notice to the owner, within X days of starting the project. Some states will even penalize your company for non-compliance.
Miss that deadline, and you could end up working for free on the project. The process and timelines do vary by state, so learn the specifics for your area, and start sending prelims to protect your construction payments on every project.
Once the prelim has been filed, the general contractor, project owner, and the lender know that you have the muscle of a mechanics lien on your side.
“Prelims are a waste of time & money.”
Some contractors don’t send preliminary notices because they think it’s a waste of time or money. I work with a commercial interior contractor in Washington named Brad. On a project one day Brad told me that, in his opinion, “Filing prelims are pretty much a waste of time and money. Even when you follow the process completely and ultimately file a lien, the GC just ‘bonds around it,’ and you never get paid anyway.”
First of all, bonding around a lien isn’t as easy as Brad thinks it is. Getting a mechanics lien release bond is expensive, time-consuming, and the non-payment claim is still likely to get paid. Even if the GC does go through with it, having your lien bonded off can actually be a good thing.
But I think what Brad was really saying is that he feels like the cards are stacked against him from the start. A lot of subs probably feel this way. Here’s the good news: sending prelims give a lot of power back to you. And there’s more good news: sending prelims doesn’t take a lot of time or money.
The preliminary notice form is really simple. You enter the project info, your company info, and then hit print. The whole process takes less than five minutes, and your construction payments are protected. There are also numerous online options to file the necessary prelim paperwork for you.
Cost isn’t really a factor here, either. The biggest expense for preliminary notice is postage. The form is required to be sent either registered or certified mail, to the required parties. Usually, this includes the GC, the owner, and the lender on the project. The total cost for postage would be less than $30.00 (for three certified mailings). Just think of the amount you spend on postage as super-cheap insurance for your receivables, and against future cash-flow issues.
Subcontractors don’t have a good argument against prelims
Many contractors are setting themselves up for trouble because they don’t file prelims on every project. Without a prelim, you are dead in the water, and can’t file a lien for incomplete or non-payment issues. I know, since I got burned on my first construction job when I didn’t file a prelim notice.
Once your prelim is in place, your lien rights are protected, and you can eliminate slow payments by flexing that prelim muscle. Whether the slow payer is the GC, the owner, or the lender, a phone call or email that mentions filing a lien to get paid, will get someone’s attention.
There really is no valid reason for not filing a prelim on every project. The process is simple and cheap. Prelims provide construction payment insurance for your receivables and future cash-flow.