Construction is tough as both a business and an industry. Contractors, labor, suppliers, officials, and other associated personnel require a higher degree of skills and technical knowledge to help construct and create increasingly complicated structures.
Consequently, they need to understand that payment processes in the construction industry is a complicated and confusing process, which takes a lot of time and energy. Sadly, it is a pattern unique to the industry which is hard to solve too.
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Why is it that hard to get paid on time in the construction industry?
A lot of risk is involved in construction projects. Such a risk is larger than anyone’s net worth. As a consequence, cash flow is quite slow. Not so long ago, the average time to get paid for construction work was at 89 days ( which is quite a long time).
Payment delays have an adverse effect on the cash flow of contractors involved in construction. When people understand the way financing a construction project works, they will see how complicated things are and what can be done to ensure payments are made on time.
The property owner, project owner, lender, construction company and general contractors are in charge of projects. They all do their best to reduce the financial risk. Their fear is all their money sinking into a project which (God Forbid) fails. Additionally, they worry about the real risk of having to make double payments.
As a consequence, they want to hold on to their money for as long as they can. They also want to verify that the work going on is complete and meets expectations, plus also desire reducing the risk of payment disputes.
The people involved in working on the construction project i.e. architects, subcontractors, suppliers, labor and the like, want to do top notch work and be paid on time. They too have employees and suppliers working for them plus they have utility bills to pay or they’ll end up in debt. They too need to make enough money to invest in an upcoming construction project.
A consequence of such conflict of interest causes construction companies to lose out on doing good work and expecting to get a good payment on time. To get paid on time in construction, everyone involved needs to understand contracts, notices, change orders, pay applications, mechanics liens, bond claims, and the like.
Laws supporting rights of construction professionals for timely payments
Project advisory professionals have decided to share with ut some laws which support construction professionals for getting paid on time:
The Mechanics Lien Law
A mechanics lien is an involuntary security interest in any physically existing property. In this situation, unpaid contractors are allowed to hold a claim in the property itself. This prevents it from either being sold or transferred unless and until all debts are cleared, paid off and resolved.
In general terms, any individual or business who has made a substantial contribution to a property thus has the right to file a mechanics lien claim.
The Public Construction Law
Government agencies are property owners of public projects. They don’t allow other parties to have a security interest in public projects. Filing a mechanics lien is not possible as different sets of laws govern these projects. Unpaid contractors and suppliers have the right to file a claim against the payment bond.
The general contractors on any public project are usually required to buy a payment bond for surety. This bond is able to guarantee that everyone involved in the project will receive their payments based on their respective contracts. Unpaid businesses or professionals can make a bond claim to recover the money owed to them.
The Prompt Payment Law
Prompt payment laws at both state and federal levels provide provisions for contractors and suppliers to get timely payments in a certain time period. In case of late payments, these laws give the unpaid parties the chance to collect an interest penalty. In some areas, they are entitled to recover attorney expenses and court expenses too.
The Contract Law
If one party is not holding their end of the agreement/bargain, the contract law gives remedies to the other party. In all honesty, there are times when the value of late payments and their associated penalties can be far greater than originally perceived.
However, enforcing a contract is not the first line of defense. Contract litigation is unfortunately a time consuming and expensive practice. The outcome is always problematic. Best is to exercise other available options instead of a lawsuit (as means of dispute avoidance).
Tips for getting paid on time in construction projects
Getting paid is a process which involves a lot of instruments and steps. Each of them improves a professional’s odds of getting paid on time. When they are used together on a standard method, such steps help in creating an almost perfect guarantee for payment. This helps construction businesses get paid on time and in full amount too:
- Documenting everything on time.
- Getting licensed.
- Formulating a credit policy.
- Pre Qualifying customers.
- Formally writing a contract.
- Collection of information regarding the property and other parties involved.
- Tracking deadlines.
- Sending preliminary notices.