Preliminary Notice & Notice of Intent to Lien
If you’re in the construction industry or have had to work with a construction company before, you may have heard terms like “preliminary notice” or “notice of intent to lien” thrown around before. But what are they, and how can you use them to your advantage in matters of subcontractor nonpayment by a contractor? Let’s take a look at these two notices and what you need to know about them when dealing with a contractor’s nonpayment.
A preliminary notice is a document that allows a person to obtain lien rights to protect them from nonpayment. This notice acts as potentially the first part of a subcontractor’s notice of nonpayment, and it must be sent at the beginning of a project, in some cases before any invoices are generated. These notices are actually required in most states and are the first step in obtaining lien rights on the project.
Failure to send the proper notice or missing the deadline ordinarily means you’ve eliminated your mechanic’s lien rights and any chance of using that legal strategy in the event you are not paid, so it’s a good rule of thumb to always send preliminary notices to all of the parties involved in the project. This allows your invoices to take precedence over others and shows transparency in the work you are completing.
Notice of Intent to Lien
While a preliminary notice is sent at the beginning of a project, a notice of intent to lien, or NOI, is sent after the work has been completed but you haven’t received any payment for it yet. What this notice of labor nonpayment or notice of does is that it warns the property owner, prime contractor, or any other party that a mechanic’s lien or bond claim will be filed unless overdue payments have been made within a certain time period.
While a notice of intent to lien is only required in nine states, it’s still helpful to send one regardless of where you live because it motivates top-of-the-chain parties to make payments in order to avoid facing a contractor lien for nonpayment
Delayed payments on construction projects are usually from a lack of communication, so sending a letter to the contractor for nonpayment can help inform parties higher up the payment chain of who hasn’t been paid. This gives them time to get their finances together while also letting them know that you’re serious about filing a lien against them if they don’t pay you.
This process can also be best compared to dunning, which is the process of communicating with customers to ensure the collection of accounts receivable. Dunning, however, can be an intimidating process, since communication can go from gentle reminders to threatening calls quickly. Each state has different laws that regulate the forms that dunning can take, typically only allowing firm reminders and taking all allowable collection options.
Incorporating the NOI Into Your Financial Risk Management
While we all hope that the construction process will go smoothly and that everyone will get paid in a timely manner, the truth is that this won’t always be the case. Situations involving laborer or subcontractor nonpayment by a contractor will likely continue to be an issue for a long time to come. Since there’s a chance you may have to fight for your payment, it’s important to include an NOI in your financial risk management strategy. Here’s what you need to know:
- The NOI can be extremely successful in prompting the payment of past-due invoices.
- The NOI can be used when a party is not responding to your invoices. At this point, you should send the NOI to top-tier parties so pressure can be applied.
- The NOI is a very cost-effective collection tool that will save you money, whereas hiring an attorney to file liens or bond claims would cost much more.
- The NOI is a more professional and kinder approach to begin with. This gives the paying party time to send you the payment, as opposed to filing a lien right away and having it officially recorded against the property records.
Through effective uses of preliminary notices and notices of intent to lien, it’s likely that you’ll be able to avoid having to issue a notice of legal action for nonpayment.