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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. However, it is critical to understand the ins-and-outs of the law in each state where you work. Each state has their own mechanics lien process and deadlines. If you fail to complete any one of the steps in that process on time, you can lose your right to file a lien entirely. Public Construction Law Typically, mechanics lien laws only apply to private or commercial construction projects. On public projects, where a government agency is the property owner, filing a mechanics lien isn’t an option. The government doesn’t allow other parties to have a security interest in their property. A different set of laws govern these projects. Though these laws don’t allow mechanics liens, unpaid contractors and suppliers will have the right to make a different kind of claim: a claim against the payment bond. The general contractor on a public project is typically required to purchase a payment bond from a surety. This bond guarantees that everyone on the project will get paid according to their contract. If a business isn’t paid, they can make a bond claim to recover what they’re owed. Similar to mechanics lien laws, claimants must follow the specifics in these laws in order to retain the right to make a bond claim. Failing to follow the bond claim process could forfeit your right to use these laws to recover payment. Prompt Payment Law Federal and state prompt payment laws give contractors and material suppliers the right to receive payment within a specific timeframe. If a payment is late, these laws allow the unpaid party to collect an interest penalty. In some places, they are entitled to recover attorney fees and court costs as well. On federal construction projects, the US Prompt Payment Act governs the deadline for payments. In addition, nearly every state in the US except has prompt payment laws that give contractors, subcontractors, and material suppliers the right to payment within a specific timeframe. Some states have prompt payment laws that only apply to private construction or public projects. Others have laws that apply to both. 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