BY NATE BUDDE
CHIEF LEGAL AND PRODUCT OFFICER
The construction industry is unique in many ways, one of which is the numerous amount of legal options a construction party has to get paid. Filing a mechanics lien is the obvious and most powerful option, but not the only one. There may be simpler ways that could also result in timely and fair payment. The proper use of notices, lien waivers, and invoices are great practices that can get you paid in a less stressful manner. Many construction parties misunderstand how to go about properly using these documents or are unaware how they can work to expedite payments, so they may not even attempt to use them at all. When used properly, these three options can cultivate good relationships with other construction parties, get you paid quickly and efficiently and protect you from future follies.
NOTICES: COMMUNICATION IS KEY
It is a rather simplistic concept, but it makes sense. If other parties do not know what is going on or who you even are, let alone if there is a payment problem, then there is nothing that can be done to correct it. Filing or sending a preliminary notice is one solution that promotes visibility on construction projects. A common misconception is that if the state you are working in does not require a notice to be filed or sent, you should not send one. This is not the case; providing an informational notice can help to make sure your invoices are prioritized, strengthen relationships, and get you paid.
Savvy companies in the construction industry always send preliminary notices, because they realize that these documents prioritize their invoices above others who do not send notice. Preliminary notices (sometimes called Notices to Owner or NTOs) can be great options for getting paid faster and more often. When sending one, you are providing evidence that you “run a tight ship.” Most general contractors and developers go to great lengths to track who is filing and not filing notices. This practice is done simply because these parties are trying minimize the possibility of a mechanics lien being filed against the property. Those parties who do not file notices are less likely or may not even be allowed to file a mechanics lien. Therefore, they get paid after those that file notices.
Many worry that filing a preliminary notice will come off as a threat or scare tactic. Not true. Preliminary notices are actually commonplace in the construction industry, and many upper-tier parties like to receive them for the information provided. And, many states statutorily require preliminary notices. The point of this type of notice is actually to protect the parties you are sending it to – mainly general contractors and owners. It gives them a chance to resolve the problems or issues before having to deal with a mechanics lien or even a legal dispute. Most parties will be thankful to receive a preliminary notice.
INVOICES: BEING ORGANIZED PAYS OFF
Organization is something everyone should achieve, no matter the industry. In construction, it is mandatory to be organized. There are too many statutory requirements, nuances, and pitfalls for a party to not conduct themselves in an organized manner. Sending invoices on a regular basis is part of that required organization and structure. How do you expect to get paid when the paying party does not know how much money you are owed?
Here’s something else to think about. Sending a notice may not matter if you do not regularly send invoices. Non-existent invoices cannot be prioritized. Developers and general contractors are not going to care about any notice you send if they have not been receiving regular invoices.
Further, in the event a dispute goes to court, being unorganized can make it much more difficult to emerge victorious, and with the payment you are owed. Even if you may be in the right, you still have to prove certain things in order to win, especially with a mechanics lien claim. For example, a Wisconsin court recently ruled against a general contractor because its records were an absolute mess. They were unable to give a simple accounting of expenses and revenues. No court will side with you when you cannot give them the basics.
INVOICES GO GREAT WITH A SIDE OF LIEN WAIVER
We talked about the importance of organization and regularly sending invoices, so let’s provide a bonus – with a lien waiver. Lien waivers are useful contractual tools that can foster trust and build better working relationships. When done correctly, a lien waiver can protect the party paying you while still preserving your lien rights in the future. By sending a conditional lien waiver with each invoice, you are ensuring that you will not file a mechanics lien claim for payments already made, and your lien rights for future payments (or payments promised but never received) are still preserved. Conditional lien waivers sent with invoices streamline the payment process, and promote faster payment. Once the paying party has that conditional lien waiver, they will not be hesitant to send you payment. They have a guarantee that they have little to worry about as long as you get paid.
Unconditional waivers are different and should never be used unless payment has already been received. The reasoning behind this is because an unconditional lien waiver is effective despite whether payment is made or not. It’s generally more important what the lien waiver says than what actually happened. It’s important for construction participants to practice due diligence before signing any contract or agreeing to any terms. Lien waivers can be beneficial, but know what is being signed.
The AGC-endorsed ConsensusDocs explicitly prohibits the use of unconditional lien waivers in their standard contract documents, which contrasts with other standard contracts in this regard. ConsensusDocs also requires “the information necessary to give notice of or enforce mechanics lien rights” including real property interest and legal title, upon written request.
KNOW YOUR OPTIONS
As a member of the construction industry, there are many ways for you to make sure you are paid fairly and promptly. Fostering good work relationships, keeping an excellent reputation, and being fair are important factors in any industry. Considering the complexity of the construction industry, these factors are vital! The best way to start is by educating yourself of all options at your disposal.
Nate Budde is chief legal and product officer at zlien. He manages the legal integrity of zlien’s products, processes, and resources. Nate is also the chief content officer & editing director of the Construction Payment Blog. He is a licensed attorney.