By Patrick Hogan, handle.com

Construction companies are highly vulnerable to cash flow issues. In the construction business, parties get paid in full only after they finish working on a project, and one late payment can snowball into bigger financial problems.

Contractors, subcontractors, and material suppliers must therefore manage their cash flow efficiently to prevent fatal cash flow issues from happening. Fortunately, there are many ways to mitigate cash flow problems and prevent them from developing into major money issues. One way of doing so is to serve a valid preliminary notice for every project that you work on.

Preliminary notices are documents that are served on upper-tier parties such as property owners and general contractors. They typically contain basic information about a construction participant’s role in a project, and also about the basic payment rights that construction stakeholders have.

If you are a construction party looking to keep your cash flow issues at bay, here are some reasons why serving a preliminary notice can help you do just that:

You become more “visible” to higher-tier parties.

“Visibility” is important in construction, especially in large-scale projects. Property owners and contractors can easily lose track of which parties are working on their projects, and this can lead to missed or late payments.

When you serve a preliminary notice, you get the attention of upper-tier parties. You inform them that you are working on their project, and they become aware of what you do and how much you expect to get paid. Serving a pre-lien notice is therefore also a good way to open communication lines among different construction participants.

Note that the deadline for serving a preliminary notice varies per state, but these notices are usually served at the beginning of a project. You want to be visible to high-tier parties early on before any major issues come up.

You get paid quicker.

Preliminary notices typically contain statements that illustrate your willingness to record a mechanics lien in case you ever needed to recover your hard-earned payment. If you serve a preliminary notice on a property owner and other stakeholders, you essentially give off the impression that you are strict and conscientious in pursuing payment from delinquent clients.

Serving a pre-lien notice therefore demonstrates your diligence and seriousness about getting paid right. And when property owners know that you do not take late payments lightly, they are more likely to prioritize your invoices.

Having your invoices on top of the list can help you get paid quicker. In an industry like construction that is notorious for payment delays and disputes, getting your invoices prioritized will be a huge help in ensuring that your cash flow is consistently in good health.

You track and manage your paperwork better.

It is a good business practice to make serving a preliminary notice part of your standard operating procedures. As soon as you secure a new project, you must gather the information needed to complete a preliminary notice and serve it as soon as you begin working.

When you streamline your business’ process for preparing and serving a pre-lien notice, tracking and managing your other paperwork efficiently will follow. Other documents such as the notice of intent to lien will be served on time, and you are also less likely to send out your invoices late.

Being a well-oiled machine when it comes to serving out paperwork is an important key in maintaining the health of your cash flow. If your books are disorganized, your invoices will not be served on time and your clients will pay you late. You may also miss the deadlines related to filing a mechanics lien, which can lead to your losing your lien rights.

You protect your right to filing a mechanics lien.

In most states, serving a preliminary notice is a required step before any party can file a valid mechanics lien. This is to ensure that owners are aware of your participation in a project, and to allow them to step in before mechanics liens get filed.

Owners are more likely to settle outstanding debts once a mechanics lien has been recorded. To protect your lien rights, you should therefore ensure that you serve the appropriate preliminary notices so you can record a mechanics lien if you need to.

Keep in mind that filing a mechanics lien is one of the best methods that you can use to recover payment from clients. Be sure to serve a preliminary notice so you have the option of recording a mechanics lien, and so you can protect yourself from potentially fatal cash flow issues.  

About the Author: 

Patrick Hogan is the CEO of Handle.com, where they build software that helps contractors, subcontractors, and material suppliers with late payments. Handle.com also provides funding for construction businesses in the form of invoice factoring, material supply trade credit, and mechanics lien purchasing.