Construction can be a tough business. Contractors, suppliers, and laborers need to have a high degree of skill and technical knowledge to build increasingly complex things. But they also need to understand a complex and confusing payment process that is unique to the industry. In this article, we’ll break down everything you need to know about getting paid in construction.
This article covers the laws that protect you, how to use them, and the specific steps you should take on every job to avoid payment disputes and get paid on time, every time.
Getting paid in construction isn’t always easy
Because of the large amount of financial risk involved in construction, money can move very slowly on a project. In 2018, the average time to get paid for construction work was 83 days. That’s a long time. Payment delays have a detrimental effect on a construction contractor’s cash flow. But when you understand how financing a construction project works, you start to see the levers you can pull to ensure payment and even speed it up.
The people in charge of a project – the property owner, lender, general contractor – want to reduce their financial risk. Their biggest fear is sinking all of their money into a project that fails. In addition, they worry about the real risk of making double payments. As a result, they want to hold onto their money as long as they can. They want to verify that the work is complete and meets their expectations. They also want to reduce their risk of payment disputes.
The people doing the work – architects, subcontractors, suppliers, laborers, etc. – want to do quality work and get paid quickly so they can pay their employees, suppliers, and utility bills without going into debt. They need to make enough money to invest in the next construction project.
As a result of these conflicting interests, construction businesses don’t have the luxury of simply doing good work and expecting to get paid on time. In order to get paid on time in construction, you have to understand contracts, notices, pay applications, change orders, mechanics liens, bond claims…it can get overwhelming very quickly. But don’t worry; we’ll break down and explain all of it in simple terms.
Before we get into the steps you need to take to get paid in construction, it’s important to review the payment laws that construction businesses need to know.
Laws that support your right to get paid
Perhaps the single most important thing a laborer or construction business owner can do to ensure that they always get paid on time and in full is to learn the laws that protect their right to payment. Knowing what your rights are will help guide you to take the appropriate steps at the right time.
Every state has multiple statutes that protect construction businesses and laborers from going unpaid for their contributions.
Mechanics Lien Law
When it comes to getting paid in construction, few laws carry as much weight or importance as mechanics lien statutes. Every state in the US has laws that gives construction businesses the right to file a mechanics lien if they aren’t paid.
A mechanics lien is an involuntary security interest in real property – it allows the unpaid contractor to hold a claim in the property itself, preventing its sale or transfer until the debt is resolved. Generally, any person or business who makes a contribution to a permanent improvement to real property has the right to file a mechanics lien claim.
One of the many reasons that mechanics liens are so powerful is that, in most places, contractors and laborers can file a claim on their own. Bringing a contract claim against a customer is a time-consuming and very expensive proposition. Filing a mechanics lien, on the other hand, can be as simple as bringing a one-page document to your local county office.
Contract Law
A contract is an agreement between two parties. In a construction contract, the property owner agrees to provide something of material value – usually money – while the contractor agrees to provide services or materials in exchange.
If one side doesn’t hold up their end of the agreement, contract law provides remedies to the other party. Sometimes, the value of these late payment penalties can be far greater than the original contract amount.
However, enforcing a contract should never be the first line of defense. Contract litigation is time-consuming and expensive, and the outcome is never guaranteed. Why jump straight into a full-blown lawsuit when you have so many other options to collect payment on time?
How to get paid (faster) on every construction project
In every step, keep the most detailed records you can. If a payment dispute arises on a project, the party with the best documentation to support their case will win. At the end of the day, it doesn’t matter whether you did the work on time and according to the contract. The only thing that matters is what you can prove.
Create a document retention strategy for your construction company, so every employee who handles documents knows exactly what to keep and where to put it. Create a new project folder for each job. Whether it’s a physical paper folder or a digital version on your computer system, make sure you follow the same process every time. And back up your files!
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