*** This is a guest post by Patrick Hogan.
Getting paid on time is a huge challenge for construction contractors and material suppliers. The construction industry is notorious for having frequent payment issues, including disputes and delays, and sometimes this seems to be the norm rather than the exception. In some instances, these payment issues can only be resolved by using the mechanics lien—a legal remedy that puts a claim on a property in order to secure payment for a debt.
Claimants wishing to file a mechanics lien need to satisfy requirements and to follow certain procedures that are sometimes specific to the state where they conduct their business. The first step to this process is the filing of a preliminary notice.
A preliminary notice is—also known as notice to owner (NTO), construction notice, or pre-lien notice—is a legal document sent by contractors, subcontractors, and material suppliers to property owners to inform them of the services they will provide and the obligation of the owners to pay for the said services.
Sending a preliminary notice is vital in protecting a contractor’s right to file a mechanics lien. In most states, missing the deadline to send a required preliminary notice may lead a contractor’s lien rights to be forfeited.
Contractors, subcontractors, and material suppliers can file a preliminary notice. However, there are differences between private contractors and public contracts.
For private contracts, all contractors, subcontractors, and material suppliers can serve a preliminary notice. The notice is sent to the party in charge of the project, which is usually the property owner, the construction lender, or the general contractor.
For public contracts, the mechanics lien is not the applicable legal recourse for payment disputes. In these cases, subcontractors are protected by the Miller Act, which requires the prime contractor to post a payment bond and a performance bond that cover all labor and materials furnished to the government before hiring subcontractors. However, only first and second-tier subcontractors are protected by the Miller Act. Subcontractors and suppliers below the second-tier may submit a preliminary notice form, but it is not required.
it will have information about the notifying party and the party they contracted with as well as the general contractor’s and property owner’s information. State regulations may also require the notifying party to include the address and description of the job site, the description of the work provided, and the estimated contract price. Some lien statutes in several states also require a specific legal statement to be included in the preliminary notice.
While it is ideal that businesses assume good faith when contracting with other parties in a construction project, securing the right to file a lien should be one of the priorities early on. Payment issues can still happen due to unforeseen circumstances. For this reason, the notifying party should send the preliminary notice in the earliest stage of the project. It is a good business practice to send the preliminary notice before the contractor’s work commences or shortly after, usually around the first 10 to 30 days.
Several states specify deadlines in their lien statutes that contractors need to meet in order to validate their right to file a lien. These deadlines range from the first day when the work commences to 120 days after the last day of providing material supplies or labor.
There are four ways that you can use to serve a preliminary notice:
State requirements vary depending on whether you are a prime or direct contractor, a subcontractor, or a material supplier.
In general, nearly every state requires contractors to submit a preliminary notice. In Texas and Mississippi, the preliminary notice for prime contractors become mandatory only upon request or upon submission of non-lien-related documents. Some states like Alabama, Illinois, Indiana, Iowa, and Oklahoma require preliminary notices on certain types of projects and contract amounts.
Always refer to individual state laws to determine whether a preliminary notice is a mandatory requirement or not.
Yes. Even if state laws do not require the submission of a preliminary notice to protect lien rights, it is still good practice to submit them.
The primary benefit of submitting a preliminary notice is to facilitate communication between project participants who are not in direct contact with each other. Some projects tend to be large in scope. The property owner and upper-tier contractors may not be aware of lower tier participants of the project. The preliminary notice helps these participants stand out and have their involvement visible to upper-tier contractors, giving them priority when the time for payment comes.
Since the preliminary notice also contains the description of the work to be done and the estimated compensation, it helps clarify the roles and expectations for project participants and reinforce their contractual obligations.
If the construction project is located in a state that doesn’t require the submission of a preliminary notice, then you can still file a mechanics lien in case of nonpayment.
However, if you are in a state where a preliminary notice is required, failing to file a preliminary notice before the deadline will make you lose your right to file a mechanics lien. If this happens and you file a mechanics lien anyway, the other party may challenge your claim in court and the judgment will most likely not be in your favor.
The bottom line: the preliminary notice is the first step in the process of filing a mechanics lien and it is vital in protecting your right to get paid. Knowing the particular requirements specified by individual state laws, especially the deadlines, form, and language to be included, is needed to ensure your ability to file a lien. Project participants must always keep track of dates and requirements to avoid difficulties in case of future payment issues.
Patrick Hogan is the CEO of Handle.com, where they build software that helps contractors, subcontractors, and material suppliers secure their lien rights and get paid faster by automating the collection process for unpaid construction invoices.