Nonpayment Prevention: A Guide for Subcontractors and Suppliers

Olivia zlien roundOlivia Huppman
Marketing Associate - zlien

As part our mission to provide the construction industry with the latest technologies and insights, we’ve partnered with zlien – a cloud-based platform built to make lien rights easy, empowering a fair construction ecosystem that everyone can trust. Construction firms, material suppliers, equipment renters, and other project stakeholders nationwide rely on zlien to eliminate the administrative headaches and legal guesswork associated with lien waiver exchanges, preliminary notices, and mechanics lien compliance, enabling them to minimize financial risk and achieve a more seamless, transparent, and fair payment process. In this collaboration, we’ll be sharing content from their expertise once a month to provide more value to the built environment.

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Nonpayment Prevention: A Guide for Subcontractors and Suppliers

Getting paid for construction work can be a challenge for several reasons. First, most construction work is performed on credit, which leaves the parties furnishing labor or material open to the risk of nonpayment. Second, construction projects are rarely completed by a single company. Projects - especially commercial, industrial, and publicly sponsored projects - are complex and involve complicated hierarchies of contractors and suppliers working together. There are often delays and stoppages when money must trickle down from the property owner through the general contractor and sometimes through other subcontractors to get to parties near the bottom of the food chain. Subcontractors and suppliers usually fall into this category.

Often, payment delays result from a lack of transparency and visibility on construction projects. When property owners, GCs, and other parties near the top of the payment chain aren’t aware of the involvement of subcontractors and material suppliers, there is little the top-of-chain parties can do to ensure that sub-tier parties get paid in full and on time.

Fortunately, there are protections in place to help ensure that sub-tier parties secure payment, as well as strategies to promote visibility and transparency throughout the construction payment process. Sending a preliminary notice helps subcontractors and suppliers - and other parties near the bottom of the payment chain - build stronger business relationships, reduce DSO, and secure payment on every project. Here are the most common questions surrounding preliminary notices answered.

What Is A “Preliminary Notice”?

A “preliminary notice” is a document that parties hired to furnish labor or materials on construction projects send to inform top-of-chain parties of their involvement on a project. Some states require that construction parties send notice in order to secure lien rights (the right to file a mechanics lien or bond claim in the event of nonpayment). The term “preliminary notice” refers to these documents generally, but they go by many different names in different states, such as ‘notice of furnishing,’ ‘notice to owner,’ ‘prelim,’ ‘pre-lien notice,’ ‘construction notice,’ and sometimes just ‘notice.’

Why Send Preliminary Notice?

When required preliminary notices are sent properly and on time, the party sending notice secures lien rights. Lien rights are very powerful and can be the difference between getting paid and eating costs for sub-tier parties on construction projects. To see if sending preliminary notice is required in your state, download one of these deadline charts, specifically for subcontractors or for suppliers.

Sending notice provides numerous benefits, even when it is not required to secure lien rights. Notices inform other parties involved on a project of the sender’s involvement and how much they expect to be paid. Sending notice keeps an invoice top of mind and helps ensure that it will be paid sooner rather than later. By proactively communicating with top-of-chain parties by sending preliminary notices, the sending party increases visibility on the project and helps facilitate a smooth payment process.

Who Should Receive Notice?

It is best practice for sub-tier parties to send notice to the property owner, general contractor, and any other party up the hiring chain.

Will Sending Notice Negatively Impact Business Relationships?

Sending preliminary notice does not harm business relationships, in fact, keeping everyone in the loop about your involvement on a project actually helps strengthen relationships with customers. Most customers view notices as a standard part of everyday business. In fact, zlien research reveals that more than 83% of notice recipients find the documents helpful.

Top-of-chain parties welcome the information included in a preliminary notice because it informs them from whom they should collect lien waivers, and helps them avoid surprise liens down the road. Best practice is to include a cover letter with preliminary notices that explains that the notice is not a lien, that it poses no threat to the recipient, and that its purpose is to inform the recipient about the sender’s involvement on a project.

How to Send Notice?

Sending a preliminary notice is pretty easy. Unlike mechanics liens, they don’t need to be filed with the county recording office. They simply need to be mailed to the appropriate parties (though it is important to check the proper mailing method - some states require certified mail return receipt requested).

The easiest way to send a preliminary notice yourself is to download a preliminary notice template. Print it, fill it out, and mail it. For companies with a larger project volume who want a more automated solution that makes it possible to send notices more frequently or even on every project, consider implementing a software that makes it possible to send unlimited notices.

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