This article is a guest post by Justin Gitelman, content coordinator at Levelset.
Cash flow is business-critical for construction during a recession
It’s a cliche to say it at this point, but cash is and will always be king – especially in construction. Contractors that can manage cash flow effectively are in the best position to win in any economy. In good times, when credit is cheap and easy to get, construction companies can get by with poor cash management skills. But during a recession, cash flow is business-critical. One late payment can be enough to push contractors over the brink of bankruptcy.
During this COVID-fueled recession, protecting your payments is more essential than ever. Most contractors are aware of the power of their right to file a mechanics lien if they aren’t paid. In fact, since the coronavirus first began shutting down construction projects in the US, we’ve seen lien filings grow by 40-60% in most areas.
While I don’t think anyone (except for lawyers) would say they love lien claims, there’s no denying how effective mechanics liens are when it comes to getting paid. But they’re the last resort – the last-ditch effort to get paid what you’ve earned.
Prompt payment laws are designed to protect your cash flow
One lesser-known option for speeding up payment and improving cash flow is actually enshrined in the laws of the federal government, in addition to nearly every single state. These are known as Prompt Payment laws, and they do exactly what their name suggests: They require payments to move promptly on construction projects. If a contractor doesn’t get paid to the timeline required by law, they are entitled to collect interest penalties and, in many cases, attorney fees.
The US Prompt Payment Act is a federal law that is effective on construction projects owned by any US government agency. The Prompt Payment Act is pretty strict. It requires public agencies to pay the prime contractor within 14 days of invoice receipt (for final payments, they have 30 days). Primes must pay their subs and suppliers within 7 days after receiving payment from the owner. Each subsequent party has 7 days to pay the party below them.
If anyone delays a payment, they are required to calculate the interest penalty and include it in the payment automatically – or else they face even steeper penalties.
States have their own prompt payment laws. In some states, these laws apply to both public and private projects. In others, they only apply to one or the other. And while the payment deadlines and penalties vary widely between states, they are all designed for the same purpose: to speed up construction payments and improve cash flow for contractors and suppliers.
In the uncertain recession economy of 2020, the construction industry needs the protection of these prompt payment laws more than ever.
Using prompt payment laws to get paid faster
While the federal law requires the paying party to calculate and pay interest fees automatically, state prompt payment laws typically require the unpaid contractor to take an additional step to claim the benefits.
The first step to claim interest penalties is generally to send a prompt payment demand letter. This letter references the prompt payment statutes and penalties, and lets the hiring party know that a legal claim isn’t far behind.
If you’re familiar with your mechanics lien rights, you probably see the similarity with the Notice of Intent to Lien. And in fact, you can even combine prompt payment language in a Notice of Intent to protect your right to claim both a mechanics lien and prompt payment interest penalties as need be.
If the demand letter doesn’t spur payment, you will need to file a prompt payment claim in civil court. While this can be a costly endeavor, many states award attorney and court fees to the prevailing party. This can provide unpaid contractors with powerful leverage to encourage the hiring party to settle out of court.
The bottom line: You have the right to prompt payment
Even if you decide not to take your late payment claim to court, simply asserting your right to prompt payment can be an effective means of getting paid.
Amidst the uncertainty of a recession, construction businesses should be taking every measure they can to protect their payments and improve cash flow. But prompt payment laws are just one of the protections afforded to contractors and suppliers by law. Mechanics lien laws are the original payment power tool, giving construction businesses enormous influence over their payment speed.
When it comes to getting paid, contractors don’t have to choose one route or the other. Prompt payment laws and mechanics lien rights are not mutually exclusive. Smart contractors understand the critical nature of cash flow right now, and use every tool in their toolbox to get the job done – and get paid promptly.
About the Author
Justin Gitelman is the Content Coordinator at Levelset, where over 500,000 contractors and suppliers connect on a cloud-based platform to make payment processes stress-free. Levelset helps contractors and suppliers get payment under control, and sees a world where no one loses a night’s sleep over payment.