How to Recognize Payment Issues on a Construction Project
Receiving payment in the construction industry can be an extremely time-consuming and stressful process. Further, payment issues are one of the quickest ways to derail an entire job. Certain payment issues can be isolated to a specific contractor or supplier. However, in most cases, payment issues are a structural problem that will eventually affect an entire project. Thus, spotting red flags that are synonymous with construction wide payment issues is vital to protect your finances. Additionally, understanding how to avoid or what to do if you experience payment issues on the construction project will help you run a successful business.
Common Payment Red Flags
There are many different indicators that the construction project you are working on is experiencing payment issues. However, below are the three most common signs that your general contractor or property owner is enduring financial problems.
Another Contractor Files a Lien
A mechanic’s lien is a security interest in the title of real property placed by those who supplied the materials or provided the labor to build or improve the property. Contractors and subcontractors typically use this remedy as a defense against the nonpayment or the imperfection of tender for a construction contract. Because of the serious nature of a mechanics lien, if another contractor you are working with files this lien, it means that they have payment issues that have been going on for weeks or months. One important note is that if you are working on a government construction project, you will see bond claims in the place of a mechanics lien.
Typically, another contractor filing a mechanics lien means two things. First, a mechanics lien could mean that the parties working on a job are not communicating in a way that is conducive to prompt payments. However, the second and worse scenario is that there are serious cash flow issues on the job that could hurt you.
Another Contractor Sends a Notice of Intent or Files a Lien
A notice of intent to lien warns the property owner or general contractor that the sender of the letter has not received payment. Further, if the sender is not paid, they will file a lien on the property to secure their payment. A notice of intent to lien is not as serious as another contractor filing an actual mechanics lien. However, it does indicate that another party is experiencing payment issues. If one company is not receiving payment, it is a good idea to try to limit your liability on the project to lessen the negative effects on your business if payment issues do occur.
The General Contractor is Having Payment Problems on Another Job
The final common indicator that a property owner or general contractor is having financial problems is if another job they are involved with is experiencing payment issues. In certain cases, jobs could be separate, and the general contractor or property owner could be funding different projects from separate sources of revenue. However, more likely than not, if a contractor or property owner is having difficulty with funding on one project, this will spill over into each of their projects.
What to do if You Spot a Red Flag
There are a few different ways to combat payment issues. However, the way you will deal with payment issues largely depends on what stage of work you are in.
If You Just Started Work
The closer you are to when you began working on the project, the more options you will have to seek payment. The first action you should take when looking to receive payment from a property owner or general contractor is to send out a preliminary notice. Simply sending a strongly worded preliminary notice could be enough to receive payment. However, certain states require one to send a preliminary notice to be eligible to file a mechanics lien. Thus, be sure to read up on your state’s individual laws to ensure that if you need to file a mechanics lien, you can take the necessary steps required to initiate this process.
If You are in the Middle of a Project
Sending frequent and consistent payment reminders is one of the best ways to keep your invoices at the top of the property owner or general contractor’s mind. Additionally, most subcontractors send out a reminder a few days before the invoice is due. Then a second reminder a few days after if the bill has still not been paid. If neither of these friendly reminders work, your next letter should be a less friendly demand letter. By constantly staying on top of unpaid invoices, your business relationships will not be disrupted as requesting payment will just seem like a normal part of your duties.
If the Job is Over
If you complete your work and still have not been paid in full, you should immediately send a notice of intent to lien. Additionally, you may also need to send a notice of intent to lien to file a mechanics lien in certain states. No property owner or general contractor wants a lien on the property they are working on. However, if you do not receive compensation, it may be time to formally file a mechanics lien on a property.
Ways to Prevent Future Payment Issues
While certain payment issues are inevitable, below are two ways that contractors and subcontractors can help mitigate future payment issues.
There are three main things that you need to communicate on your job that will help prevent payment problems. The first thing that you should communicate to the general contractor or property owner is the work you are doing. Second, you need to state the amount this work costs. Finally, layout a plan that shows when you expect to receive payment. By taking these steps, you work towards receiving payment and mitigating the chances that you will experience issues. Another benefit of using this communication strategy is that you have a paper trail. This paper trail will help you if you ever have to file a mechanics lien.
Check Payment History
When working with a general contractor or property owner for the first time, run a credit check on them. Additionally, many companies look into the history of the general contractor or property owner. They will look to see if they have any mechanics lien as well as looking at their payment profiles. This plan of action allows you to figure out the payment risk associated with working on a job.
Contact Our DC Law Office for More Information
Finally, for more on how to recognize payment issues on a construction project, contact us at 202-803-5676. You can also directly schedule a consultation with one of our skilled attorneys. Additionally, for general information regarding construction law, check out our blog.