Preliminary notices are a near constant in the construction industry. Most states require a party to send some sort of preliminary notice in order to remain in a secured position. Even when a preliminary notice is not required, there are tangible and substantial benefits to sending them.
Most importantly, sending preliminary notices on every project results in fewer liens being required. Sending a preliminary notice gets companies paid more often, and paid faster.
Preliminary Notice Benefits the Owner
One of the most commonly given reasons for not sending preliminary notice is that companies don’t want to “rock the boat” or cause tension in their business relationships. While understandable, this is not a good idea. The reality of the construction industry is that companies expect to get preliminary notices, and in many cases want to receive them. Here’s why.
The mechanics lien instrument was created for the benefit of those furnishing labor and/or material to a construction project, as a protection against nonpayment. Preliminary notice requirements, however, provide protection and information to the parties in control of the money. It provides protection by placing an additional strictly construed requirement as a prerequisite to filing a valid lien, and provides information by creating visibility on the project.
The property owner and general contractor, the parties at the top of the payment chain, have their own particular risks and difficulties associated with the construction payment process. One of the chief difficulties is directly related to the visibility problem inherent on construction projects, and the associated risk of liens from unknown parties. Construction projects can be large, convoluted and complicated projects with an enormous number of parties. General contractors hire subcontractors, which hire sub-subcontractors, which hire suppliers that are far removed from the parties with the money. This is a problem. The owner and general contractor are charged via public policy and the mechanics lien instrument with ultimately controlling the flow of payment on the project. This is difficult to do when some parties are hidden from view. After all, a general contractor can’t make sure a supplier is paid if the general contractor has no idea who that particular supplier is, or that it was even on the project.
This is the primary benefit of the preliminary notice. By sending notice to the top-of-chain parties, lower-tiered party can create their own visibility and create the best position for payment.
How This Means Fewer Lien Claims
The visibility generated by providing preliminary notice means faster payment and less payment issues.
Owners and general contractors know which parties are sending preliminary notices. Tracking the receipt of preliminary notices is a function that companies undertake to manage their financial risk. When required preliminary notices are sent, the noticing party remains in a secured position, and is able to use the support of the mechanics lien in the event of nonpayment. This does not go unnoticed by the parties at the top of the chain. While owners and general contractors want to be fair and pay for the work performed, who do you think gets paid faster in the event of some hiccup with the money: a party who has retained lien rights and can collect through the property itself, or a party who has no lien rights? The answer is simple.
The fact of the matter is that in construction, like nearly every other business, invoices get prioritized. Sending preliminary notice does wonders for the prioritization of a company’s invoices. Also, as noted above, preliminary notices provide visibility. It’s a lot easier to get paid when the people with the money know the company is there.
The prioritization of invoices and the visibility provided by sending preliminary notice means companies get paid, and get paid quicker. This, in turn, means that fewer lien claims are required in order to prompt tardy payment. Sending preliminary notices is cheap insurance, and a good business practice for every construction industry participant.