The construction industry is based on relationships. While the same can be said for many industries, the unique nature of construction projects puts these relationships into stark focus.
The construction payment structure is complex, and the extensive network of parties on every construction project means there are inevitable payment delays. Building stronger relationships, and playing fair, can result in less payment trouble and more clarity.
Payment problems for parties in the construction industry can occur for many reasons, but a significant factor is the complex web of parties on nearly every project. It's (relatively) easy to build relationships with the parties with whom one is in direct contact. But the nature of construction projects means that there are likely many other parties on the project that are either unknown, or thought to be too far removed to effectively build relationships.
The heavy reliance on credit for payment, though, means that an attempt to build better relationships is never unfounded. After all, it doesn't hurt to have a better relationship with the parties closer to the money. And, on the other side, liens and other project-frustrating measures may be avoided on the back of stronger relationships.
Parties at the top of the chain are naturally provided leverage due to their close proximity to the origin of the money, and parties at the bottom of the chain are provided leverage through the utilization of the mechanics lien process. Balancing these competing pieces of financial leverage, building relationships, providing clarity and addressing common misunderstandings can help everybody avoid issues.
And, thankfully, current technology platforms can be utilized to strengthen your industry relationships.
Two-fold approach to using tech to build relationships
1. Visibility and security
The first step to using technology to strengthen industry relationships begins with visibility and security. Sending preliminary notices on every project, whether required or not, and no matter with whom a party contracted, is important for two reasons.
- It will provide security to subcontractors and suppliers by protecting their right to file a lien in the event of nonpayment (if required), and/or will prioritize the invoices of the noting party.
- It affords the GC and property owner visibility regarding the parties on the project and allows them the ability to track the security status of every participant below them. This lets the parties at the top of the chain monitor and manage their exposure to liens through knowing exactly what lien waivers need to be collected, and it benefits bottom of the chain participants by providing the GC with visibility as to which parties need to receive payment.
2. Understanding the process and how to make it work for everybody
Sending preliminary notice to promote visibility and retain security, coupled with the request of lien waivers upon payment to manage the threat of potential liens, should beneficial for both payer and payee. However, a lack of understanding between the two parties often acts as a roadblock.
Just like sending a preliminary notice on every project, lower-tiered parties should also send a conditional lien waiver along with every invoice or pay-app. Since a
"conditional" waiver only waives any rights upon some certain condition being met (generally payment actually received), lower-tiered parties should realize that a conditional waiver doesn't need to be withheld until the check clears.
A conditional waiver can be sent prior to payment being received, which is beneficial to the paying party in managing potential lien exposure, and can result in faster payment and better relationships. Not being required to chase down a lien waiver, and/or not being sucked into an escrow-type solution makes everything easier on the party making the payments.
Technology can make this happen
Existing technology can automate the preliminary notice and lien waiver processes. By examining data across multiple states and thousands of projects, cloud-based SaaS products can instantly calculate notice requirements and can execute those actions based on a particular company's preferences.
In a similar manner, lien waivers and their exchange can be nuanced and complex. A lien waiver is a full-fledged legal contract that requires review to ensure its accuracy and also complete understanding of its meaning. And, the logistical aspect of the exchange can present problems, especially in high-volume situations.
Once again, cloud-based SaaS products may be the solution to these issues. The benefits presented by this type of technology may lead to more collaboration among industry participants, and better relationships among the adopters.
The ability for parties to have complete clarity regarding their projects and the payment process, and the ability to have a trusted, unbiased platform through which documents may be exchanged is a building block to making the construction payment fair for everybody.
