Welcome to the construction industry, where everything runs on credit and on-time payments are few and far between. But that's not a big secret in the construction world we live in. Building a better business and knowing what you're up against in this industry is imperative to getting paid and staying in business. The golden rule in keeping construction companies in business is never working for free. So, just what is the secret to successfully collecting what is owed?
The Secret to Success in the Construction Industry
The squeaky wheel gets paid first; but what exactly does that mean? It means that if a company has a consistent collection strategy, the companies it works for know it is proactive and will send notices and make phone calls if it is not paid. Companies the contractor works for will prioritize making sure the contractor is one of the first ones to get paid.
Once a consistent collection strategy, is in place, the number of files in collections will decrease quickly, which is because the contractor will be known as the "squeaky wheel." It's something clients will begin to expect. Contractors have to be consistent in that, and have to do the same thing each time—otherwise, clients will push the company around and it won't work.
Key Component of a Consistent Collection Strategy
One of the key pieces of a consistent collection strategy is that the strategy includes the steps required to have a valid lien in the contractor’s state. Before getting into the steps to have a valid lien, it is important to understand what a lien is and the leverage it provides if the proper lien process is followed. The construction industry runs on credit, which means the business extending credit is owed a debt. For example, a subcontractor who works and supplies labor and material for an entire month submits a pay app at the end of that month requesting payment for that work; a debt is owed to the subcontractor.
Breaking Down Unsecured and Secured DebT
Everyone should understand that there are two types of debt in the construction industry: secured and unsecured debt. Unsecured is debt with no asset pledged to secure collection of the debt. When you hear the words unsecured debt, think of credit card debt. If you don't pay your credit card, the credit card company has to sue you to get a judgment and then find your assets to collect. A secured debt is a debt that is tied to an asset that could be sold to satisfy the debt. When you hear the words secured debt, think of a mortgage. When you buy a house or any other property and don't pay cash, you borrow money from a bank. You give the bank a security interest in the property you are purchasing at closing. This means that if you don't pay the bank, they can kick you out of the property and sell it to pay back the money you owe. The debt owed to the subcontractor in the example mentioned above is unsecured. The subcontractor can make the debt owed a secured debt if they follow the proper rules to have a lien. Once the subcontractor has filed the lien, the amount owed is secured by the property they improved with their labor and material. If the subcontractor is still not paid, they can file an action to foreclose their lien and seek the sale of the property to pay the lien. Although the property sale is the ultimate remedy, 99% of lien cases settle before that sale ever happens.
What Makes a Lien Enforceable?
Because the ultimate remedy of a lien is the forced sale of the property to pay the amount a lien claimant is due, all the steps required to have a lien must be followed exactly, or the lien will be invalid. Generally speaking, to have an enforceable lien, a contractor must send notice of the amounts it is owed before filing a lien and must file the lien by a certain deadline. The exact rules for when notice needs to be sent and when a lien needs to be filed differ depending on the state of the project. No two states have the same requirements. Contractors can look up the detailed requirements to file a valid lien for their state at subcontractorinstitute.com, where each state's lien rules are broken out and listed step-by-step, in plain English. While each state's lien laws are different, a few states require what sometimes is referred to as a preliminary notice, which means that the contractor is required to send notice before any amounts are actually past due. If the contractor is in one of the following states and does not have a consistent collection strategy that includes sending preliminary notices, it is leaving money on the table.
The States that Require a Preliminary Notice:
It's crucial to understand that the secret to success in the construction industry is being the squeaky wheel and creating a consistent collection strategy, which then helps contractors get paid first on all projects. The lien process can be quite complicated, but mastering it and making sure it is a part of your company's collection strategy is key to increasing cash flow and dominating the market.
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