Well before COVID-19 introduced itself to the world in dramaticand disruptive fashion, construction businesses struggled to get paid. In fact,driven by a desire to encourage land development and protect contractors frompredatory payment practices, Thomas Jefferson introduced the nation’s firstmechanics lien laws in the 18th century.
In the 200 years since, every state has adopted laws that give unpaid construction businesses the right to file a lien on the property they work to improve. Despite these protections, a majority of contractors and material supply companies continue to experience long payment delays. They spend a significant amount of their work week fighting to get paid what they earn.
Construction Evolved to Accept Slow Payment
Despite the widespread existence of these legal protections, the building industry has largely evolved to accept payment delays as a fact of existence beyond their control. In a construction payment survey conducted in Q1 of 2020 before COVID-19 upended the economy, 53% of contractors reported high levels of satisfaction with their payment speed. At the same time, only 26% said they always received payment on time according to their contract.
A consistent disconnect between expectation and reality likely led many construction companies to simply accept slow or partial payments as the cost of doing business. The complacency in the face of non-payment could help explain why professionals in the construction industry suffer some of the longest times to payment and the highest rates of business failure. A spike in project and payment delays during COVID-19 has only worsened outcomes.
COVID-19 Provided a Wake-up Call For Construction
In the same 2020 contractor survey, fewer than 1 in 3 said theyalways protected their right to file a lien in the event that they weren’tpaid. If they felt comfortable with late payments before, the advent ofcoronavirus turned the tables. With projects in many states suddenly shut downor subject to indefinite delays, those construction companies that failed toprotect their lien rights found themselves in dangerous territory, with fewoptions to recover payment for work they had already performed.
The construction companies that did have protection took swift action to put their business at the front of the payment line. Between February and April 2020, mechanics lien filings rose by as much as 63%.
For better or worse, the COVID-19 pandemic has given theconstruction industry a wake-up call. The sudden impact has exposed the fatalweakness of construction businesses that fail to protect their payments onevery project.
Payment Protection is Critical
Even if the coronavirus magically disappears tomorrow, the threatof the next global pandemic will continue to loom, casting a pall of financialrisk over the industry. Construction businesses will need to adapt their creditpolicies to a new environment of perpetual uncertainty.
Fortunately, the process of protecting lien rights is simple to implement. In a majority of states, maintaining the right to file a mechanics lien is as simple as sending a preliminary notice at the start of a project. In states where it’s required, a preliminary notice protects a contractor’s right to file a lien or bond claim. Even on projects where it isn’t necessary, sending a prelim improves communication with the parties in charge of the checkbook. In fact, sending a notice is so effective at getting construction businesses paid, it often prevents the need for mechanics lien claims entirely.
As Winston Churchill once said, “Those who fail to learn fromhistory are condemned to repeat it.” COVID-19 has changed the way constructionbusinesses do business. Many will look to the future, adopting new systems andtechnology that allow them to achieve more work with less risk. But financialsuccess in an uncertain future will ultimately belong to constructionprofessionals who understand the past. They will find consistent protectionfrom a 200-year-old tool provided by one of the country’s founding fathers: themechanics lien.
Justin Gitelman is the content partnerships coordinator at Levelset, where over 500,000 contractors and suppliers connect on a cloud-based platform to make payment processes stress-free.