Every Contractor wants to be paid for the work that they do. Getting paid on time for the work completed is integral to the success of any construction business. Your pay is your livelihood, and the best way to protect your payment as a California construction worker is to develop a consistent collection strategy.
The construction industry runs on credit, and it is essential that you know how to protect your money and use it to your advantage. This all begins with developing a strong collection strategy. The key to having a good collection strategy is understanding that collection shouldn’t start when you are owed money. It should start before you begin a project. This means having a fair construction contract signed, having all the contact information of whoever is in charge of paying you, and having a good construction attorney on your team. Additionally, you should have a designated individual responsible for handling collections and payment problems. And finally, you must know and obey your state’s lien laws to a T, or else risk filing an invalid lien.
Fortifying your collection strategy begins with having a well-written construction contract that sets clear expectations on pay processes, so the Owner knows exactly when and how you expect to be paid. This is especially crucial on the residential side. You can have a milestone payment term in your contract, but the homeowner will not know when you hit those milestones unless you tell them. You should inform the homeowner when you’ve hit each milestone and send an invoice with advanced notice to ensure they know you are ready to be paid. With all of this in mind, step one is clearly outlining your collection plan in your California construction contract.
What Is a Lien
Step two is understanding what a lien, often referred to as a mechanic’s lien, is and how you can use it. The general idea is that the construction industry works on credit, so you, the Contractor, are working and then waiting to get paid. Whether you’re in commercial construction or residential construction, that is usually how it works. There is clearly some risk involved regarding your pay. You’ve given them credit in labor and materials and are waiting to be compensated, which is known as an unsecured debt. What a lien does is make that unsecured debt secured with the property. Now you have a lien on the property that your labor and material went to, giving you a security interest that backs up the money you are owed. In this instance, you actually still have both the secured and unsecured claims. Your unsecured claim is your breach of contract claim against whoever hired you, should they neglect to follow the contract and pay you, and now you also have the lien foreclosure case against whoever’s property it is, whether it’s whoever hired you or not.
So, it is a powerful remedy to go from an unsecured debt to a secured one, and that’s why there are so many rules for having a valid lien. That being said, it is integral that, as part of a consistent collection strategy, you understand all the elements that are required to have a valid lien. Another important early step if you’re working with the Owner on a residential property is having specific language in the contract that says you can file a lien and people that work for you can file a lien. Without this terminology in your contract, you waive your right to put a lien on a residential property. No Contractor should lose their lien rights because they forgot to write them into their contract.
Always Send Your Notices
Another element of mastering your collection strategy is always remembering your notices. Notices give the Owner and the General Contractor a chance to make sure any unpaid party is paid. The notices that are required are intended to let people, further up the construction food chain, know that you are not being paid. You can always send noticed early, and there is not a limit for how many you can send.
In California you need to send a notice to the Owner within 20 days of your first day of work, reminding them that you are present, and that, even though you are not currently filing a lien, you could file one if you are not paid. This applies for both residential and commercial jobs. What this does is attempt to give the Owner a chance to make sure everyone downstream is compensated before he pays the individual/s he hired. This ultimately works to try and prevent liens from ever having to be filed. Notice requirements are different in every state, but California requires Preliminary notice, sometimes referred to as an Early Notice or Pre-Lien Notice.
Filing Your Lien
If you have not been paid, you must file your lien right away. California has very tight deadlines for filing liens, and they expire quickly as well, in most cases you have just 30-90 days. Before your lien expires, you need to file suit to enforce the lien (begin litigation) or else you could lose your ability to collect. You can find the details to California’s lien deadlines at The Subcontractor Institute. Every state has different lien laws, so it’s important to do your research. Be sure to brush up on your California lien laws in order to ensure that when you file your liens, they are valid and submitted in a timely fashion. At the end of the day, these are some of the most essential elements of building an airtight collection strategy for California construction professionals.
As a California Contractor, it is essential that you know and properly utilize your lien rights, and that you develop and implement a consistent collection strategy. This is the very best way for you to protect the money you are owed for the work you do. For more information on California’s specific lien laws, visit The Subcontractor Institute or contact The Cromeens Law Firm, and set up a consult. At the end of the day, what matters most is that you get what you are owed. Take the first step and construct your collection strategy today.
About the Author:
Published author, award-winning lawyer, devoted wife and mother to three girls, and Owner and seasoned Managing Partner of The Cromeens Law Firm (TCLF), Karalynn Cromeens is a true jack of all trades. Karalynn is the Co-Founder of Morrell Masonry Supply and Owner of The Subcontractor Institute, an easy-access online educational platform for contractors. In addition to TCLF, and The Subcontractor Institute, she is also the Host of the rapidly growing educational construction podcast, Quit Getting Screwed – making cost-free industry insight available to contractors across the country. In 2021, Karalynn published two Amazon Best-Selling books – Quit Getting Screwed: Understanding and Negotiating the Subcontract and Quit Getting Stiffed: A Texas Contractor’s Guide to Liens & Collections.
In the seventeen years she has practiced construction, real estate, and business law, Karalynn has reviewed and explained thousands of subcontracts. For years, she has tried saving companies that have signed problematic subcontracts and lost out on being paid for their work. Unfortunately, it was too late by the time they came to her; she could do nothing to help. She hated seeing clients lose money—sometimes their entire business—over language they did not understand and laws they did not know about. Watching these situations play out day after day was the driving force behind her two books, The Subcontractor Institute, and the firm’s accessibility efforts. Providing education to contractors on a national level has become Karalynn’s personal mission, and she is always doing what she can to help make it a reality.