Getting paid — on time and in full — is vital in running a successful construction business. As a contractor, invoices settled in full and on time pay for materials, services, labor, and subcontractors used to satisfy the contract.
Equally important, timely payments give the liquidity to continue taking on new jobs.
Then again, it remains true that many contractors struggle with getting paid in full and on time for various reasons. Several studies found that over 90 percent of contractors face issues in getting paid in full.
In industry-speak, they struggle to get the retainage or the remaining balance after the upfront payment. Retainage or retention is a standard industry practice as it protects both the contractor and the client.
From the contractor’s side, the practice standardized that some percentage of upfront payment is required to start a project while the client gets the protection from not having to pay in full until the job is complete.
This practice is done in good faith but there’s still an overwhelmingly large percentage of contracts where contractors don’t get their full due.
Getting paid in full and on time doesn’t come easy. It requires contractors to do their due diligence to put themselves in the best position to get fully paid on schedule.
In this guide, we outline the things contractors must do to ensure they get paid during the project and once it’s done.
- The Construction Contract
- Construction Contracts: Tips on ensuring timely payment
- What do you do when a client doesn’t pay?
- What is a Mechanics Lien?
- Sending a Preliminary 20-day Notice in California
- When to file a lien?
- Required Information On Your California Mechanics Lien
- Lien Extensions
- Taking legal action
The Construction Contract
The contract is a contractor’s strongest weapon. A client that adheres to the contract is every construction business owner’s dream. Getting stiffed and leaving a finished job feeling unfairly compensated can lead to serious business issues especially in California where pay-if-paid and pay-when-paid clauses are not enforceable. This means the contractor is liable to pay subcontractors even when there is a payment issue with the property owner.
Ideally, the property owner (client) and the contractor are a team. However, there are cases where the owner and the contractor don’t see eye to eye on certain things. The contract ensures that both parties are protected in case of a dispute as it outlines what has been agreed upon before either party invests resources like time and money into a project.
What should be included in your contract?
This guide outlines what you need to include in the contract in order to ensure that you’re protected and don’t get blindsided down the line. It pays to be familiar with the ins and outs of a construction contract and what goes in it. That said, we strongly recommend that you seek the services of a construction lawyer when putting together a contract for a job.
IMPORTANT: California requires that the construction contract include the contractor’s license number, per California Business and Professions Code section 7030.5.
The CA construction contractor’s license number must be included in “(a) all construction contracts; (b) subcontracts and calls for bid; and (c) all forms advertising, as prescribed by the register of contractors, used by such person.”
The list above outlines what has to be included in the contract. Since construction contracts must be tailored to your specific situation, you should maximize this by including language that promotes and prompts timely payments. Read on for tips on how to do this.
Construction Contracts: Tips on ensuring timely payment
Working with new clients? Up the upfront payment.
The language on the portion of the contract breaking down the costs and payment schedule is essential in making sure you get paid on time. While assuming good faith on the side of the property owner is good customer service, best practices dictate that you should always safeguard your financial interest and minimize the risk of losses.
If you are working with a new client, it’s wise to demand a more significant percentage of upfront payment, leaving a smaller retainage. This is also wise to apply to cases where the property being built it speculative; for example, a new business venture. Repeat clients with solid track records could be given more flexibility.
Be flexible in your payment methods. Make it easy to pay.
Make sure the contract details how and when invoices will be sent and the payment methods available to the client. Invoices are usually sent via email, registered mail or private couriers. Including a self-addressed envelope along with the invoice sends a gentle nudge for each time you send the bill. It’s also a must to include all the necessary details needed in case the client will be paying online or through the bank. Automating this process saves a lot of time and reduces the risk of inaccuracies which are the leading cause of late payments and invalid invoices.
Impose penalties on late payments.
Structuring the payment schedule so as certain milestones in the project trigger a payment will help you collect on time and manage cash flow better. In the contract, include a clause that details the penalties for late payment. Contractors are entitled to obtain interest on balance unpaid past due. That said, it has to be noted that these penalties deter late payments but it can be difficult to recover penalties that come close to the total retainage without going the lawsuit route.
An airtight contract goes a long way in ensuring that the client adheres to mutually agreed upon payment schedules and figures. That said, there are still cases where the client is getting a little bit difficult to get in touch with or may seem to be too busy to uphold their end of the agreement.
What do you do when a client doesn’t pay?
Getting your retainage or the remaining balance could require anywhere from a simple reminder to a full-blown lawsuit. The key is to act fast. The longer a bill has gone unpaid, the more difficult it is to get paid.
It’s always prudent to retain a good relationship with people you work with so the steps we’ll be outlining here gets progressively aggressive and potentially abrasive to the relationship with your client. Then again, note that in California, the steps you can take to address a non-payment are affected by the amount of time you wait after project completion.
Send a registered mail and/or an email reminding your client that a bill is past due. This applies to any payment scheduled even in the middle of the project. Send a copy of the bill and penalty reminders along with your notice.
Drop in to follow up.
When a client fails to pay a few days after a reminder has been sent, the next step is to drop in for a visit or call them directly. This gives you the chance to inquire about the reasons for non-payment, including possible issues on the client-side. In some cases, clients withhold payment due to not being satisfied with the work done so far. This gives you an opportunity to investigate and make the issues right.
There are also cases where the subcontractor who works on site has not been paid and they have ceased working and have communicated this with the owner. It’s very important for you to constantly communicate with subcontractors and other people you’ve put on-site to work on the property.
In California where pay-when-paid and pay-if-paid clauses are historically not enforceable, it’s critical to structure your agreement with the subcontractor in a way that de-risks the property owner (as that will impact your relationship with them) and that de-risks you as well. Arrange the schedule of payments in a way that syncs works well with your level of liquidity and your confidence on the promptness of payment based on your assessment of the client and the project.
There are cases where clients refuse to settle payments out of dishonesty or out of a hope that they could renegotiate the project price. Situations such as these require great care in choosing the next best steps. It’s not always smart to act out of principle but there are many factors that should be considered before proceeding. Taking legal action, renegotiating, or taking the hit are all options that you should consider.
Remind the client that you file a lien upon their property.
If the client still fails to pay, it’s time to consider filing a mechanics lien. Before you can file a lien in California, you need to let your client know that you intend to do so. The Preliminary 20-day Notice (also called a Notice of Intent to Lien or a pre-lien), is a straightforward document letting the client know that non-payment will result in the filing of a lien. Sending a Preliminary Notice gives the client an opportunity to make things right before you file a lien.
What is a Mechanics Lien?
When a client still fails to pay, you can file a mechanic’s lien, sometimes called a construction lien, laborer’s lien or artisan’s lien. A lien states that you have a claim on the property because of unpaid work you put into it. While a lien is on the property, it’s difficult for a client to sell or refinance it, and it has an immediate negative impact on their credit score.
The mechanic lien is a tool to get private construction projects paid on time. It has the power to prompt payment from clients that haven’t paid on time or at all.
Mechanics liens are a legal claim against remodeled or built properties and are used by contractors and suppliers all over California to ensure payments on their jobs.
As a Full Price state, California contractors have the right to file liens that secure the whole cost of work done on construction projects.
As a safeguard for contractors, the process of getting a mechanics lien filed and enforced starts before any payment issue arises.
Sending a Preliminary 20-day Notice in California
In California, contractors, subcontractors, and suppliers are required to provide the client notice before filing a lien. This is commonly called the Preliminary 20-day Notice. In a nutshell, it’s a written record that you (the claimant) has notified the client before filing and recording a mechanics lien. Similar to preceding recommendations in this guide, the Preliminary Notice gives the client an opportunity to make things right before the contractor escalates their response to the non-payment.
The preliminary notice needs to include the following information, at the minimum:
Sample Preliminary Notice
A – Name of the owner (or reputed owner*)
B – Name of the contractor director and their address
C – Name of the lender and their address, if any
D -A general statement of the work provided
E -A financial estimate of the price of total work provided
F – The name and address of the person or entity who provided the work or materials
G – The name and address of the person or entity to or for whom the work or materials is provided
H -Description of the site for identification, including street address if possible
I -A legal notice statement (in boldface type)
Once the Preliminary Notice has been written up and ready for sending, make sure to furnish copies for the following people and/or entities even when you deem them not involved in the project.
- the owner
- the contractor/s
- the construction lender
Make sure to send the Preliminary Notice by the 20th day after your first day of furnishing labor or materials to the job site. This is your deadline for the Preliminary Notice to cover all the work done thus far.
If you’re only able to send a notice later than 20 days after the first day of work or delivery, the subsequent lien will only cover work rendered 20 days within the day you sent the notice. Best practice is to send a Preliminary Notice soon after starting work on a job site to protect your right to file a lien, just in case it becomes necessary.
You have several options when it comes to delivering the Preliminary Notice:
- Deliver the Preliminary Notice in person
- Leave it with a person at the residence or business address of the intended recipients
- Send the notice by registered or certified mail
Record the date and method you used to deliver the notice, as well as other details that will support the fact that a notice has indeed been sent. Also, keep a copy of the notice for your own record.
More questions on the California Preliminary 20-day Notice? Check out this article.
Successful contractors know that serving a Preliminary Notice is just part of good business practice. It’s not a form of threat or a demonstration of distrust to the other party’s ability to pay. It’s just a way to safeguard your right to lien in case something goes wrong down the road. When you don’t file a Preliminary Notice, you lose your right to lien. In many cases, exercising the right to file a mechanics lien is the only resort to address non-payment. Not serving a Preliminary Notice takes away this right.
When to file a lien?
Filing a lien is the next step to take in case your invoices still haven’t been paid. In California, here’s the timeline you want to keep in mind:
- If the owner filed a Notice of Completion or Notice of Cessation, the mechanics lien must be recorded within 60 days of the filing of the notice.
- Otherwise, the claimant has to record the mechanics lien within 90 days of work completion/last day of work.
Time to file?
Required Information On Your California Mechanics Lien
Each state has its specific rules and requirements when it comes to what information should be included in the lien form. Failure to include all the required information and failure to comply with specific rules, such as which parts of the text should be in bold type, can lead to an invalid lien.
While California mechanics liens do not need to be notarized, it is a requirement that claimants include a signed and verified written statement that includes all the following information:
- A statement of the claimant’s demand (what is owed) after credits and offsets
- The name of the property owner
- A statement of the type of work provided by the claimant
- The name of the person who employed the claimant (client, or direct contractor in the case of subcontractors)
- The description and location of the work site
- The claimant’s address
- A proof of service affidavit completed and signed by the person serving the mechanics lien. The following information should be included in the affidavit:
- The date, place, and type of work delivered.
- Facts that support the fact that work has been delivered.
- The name, address, and title of the person or persons upon whom the lien was served.
- How the lien was mailed and tracking number.
The proof of service affidavit ensures that the lien is served upon the property owner or someone in the capacity to receive on their behalf. The affidavit must be filed along with the lien.
- A statutorily mandated statement printed in 10-point boldface type.
- The last sentence must be printed in uppercase, except the website address of the California Contractors’ State License Board www.cslb.ca.gov, which shall remain in lowercase type.
How to File and Record a California Mechanics Lien (Step-by-step)
- Sign and verify at least two copies of the mechanics lien
- Send a copy to the property owner and other parties that need to be notified of the lien (lenders, contractors, etc.)
- Deliver a copy of the mechanics lien to the county recorder and pay the filing fee.
- California requires mechanics liens to be delivered to the county recorder where the work was delivered (i.e. county where the site of the project is).
- The mechanics lien may be filed via mail, private courier (FedEx, UPS, etc.), or via walk-in. Private courier and walk-in filing are encouraged in some counties where the recorder’s backlog is especially long.
- For liens sent through private courier and mail, you must include the filing fees and a self-addressed envelope with return instructions.
- You may inquire about the fees with the county recorder. It is usually a set fee for the first page of the lien and smaller, additional amounts for each page thereafter.
- Once the document is recorded, keep a stamped copy of the recorded lien.
As long as you served the document to the property owner prior to submitting the document for recording, the stamped copy of the recorded lien in your possession ensures that you have an officially recorded mechanics lien. However, an officially recorded mechanics lien doesn’t ensure that it is valid. Errors in the filing can invalidate your mechanics lien. The property owner or their attorney may also challenge the lien, claim that it is improper and must be removed.
In California, a mechanics lien will expire 90 days after its filing date unless a lien foreclosure action is filed to enforce the claim. Frequently claimants wonder if they can simply “extend” the lien.
In California, there is a provision to extend the lien’s validity period, but it’s rarely used. Extending liens in California is uncommon because of how difficult it is to complete the extension requirements; most difficult of which is getting the owner’s signed consent for the extension. Getting a property owner to agree to extend a lien against their property is something very difficult to do.
It could be possible if the contractor negotiates with the owner on a credit or payment plan. In that scenario, the lien serves as the collateral in case the agreement is not satisfied. This allows the owner to avoid a foreclosure action.
If the lien isn’t extended by agreement, the foreclosure would be necessary.
In this situation, the owner and the contractor files what is referred to as a “Lien Extension,” formally called the “Notice of Credit.” Per California Civil Code 8460:
- (a) The claimant shall commence an action to enforce a lien within 90 days after recordation of the claim of lien. If the claimant does not commence an action to enforce the lien within that time, the claim of lien expires and is unenforceable.
- (b) Subdivision (a) does not apply if the claimant and owner agree to extend credit, and notice of the fact and terms of the extension of credit is recorded
- (1) within 90 days after recordation of the claim of lien or (2) more than 90 days after recordation of the claim of lien but before a purchaser or encumbrancer for value and in good faith acquires rights in the property.
- In that event the claimant shall commence an action to enforce the lien within 90 days after the expiration of the credit, but in no case later than one year after completion of the work of improvement. If the claimant does not commence an action to enforce the lien within that time, the claim of lien expires and is unenforceable.
(Added by Stats. 2010, Ch. 697, Sec. 20. (SB 189) Effective January 1, 2011. Operative July 1, 2012, by Sec. 105 of Ch. 697 and by Section 8052.)
There is no way to extend a mechanics lien to still be effective beyond one year after work completion. The owner has to know this and sign it off on the notice.
In any case, keep the communication professional. It’s normal to feel frustrated and even angry at a client for their non-payment. However, threatening and disparaging them can cause the client to further ignore notices and not cooperate. You are in the right for seeking to satisfy a business agreement. Don’t let poor judgment cloud the outcome of your pursuit.
Liens are very successful in securing payments for claimants but there are situations where the action needs to be escalated. In case they don’t even after extending the lien, you have two options
- Enforce the lien with a lawsuit.
- Wait for the property to go on sale.
Going with the second option, you will be paid based on your footing in the list of other parties who have laid a legal claim on the property.
Taking legal action
Unfortunately, having to take legal action to get invoices paid is not a new thing in construction. It’s said that about half of subcontractors have had to take legal action to get what’s due to them. Failing to collect after filing a mechanics lien gives the claimant several options, and the mechanics lien puts them in a definite advantage should the situation come to this point. This highlights the fact that for contractors, subcontractors, and suppliers, protecting lien rights must be a priority.
Getting paid on time and in full in construction requires strategic play. Reactive contractors who only take steps when an invoice is past due are bound to lose money on plenty of their contracts.
Filing a Preliminary Notice on all your projects is just good practice. Fortunately, there are solutions that can help you make the whole lien process swift and error-free–from the Preliminary Notice to the Mechanics Lien. At Handle, we help contractors, subcontractors, and suppliers get paid faster.
If you have any questions, please feel free to comment below. Our experts at Handle are ready to help!