There are clouds gathering now on the payment horizon for the construction industry. The clouds converging now and on into the fall call for even greater attention to protecting construction industry receivables. This applies to the industry from top to bottom.
Construction was an “essential business” allowed to continue operating in Minnesota. That designation allowed work to continue but is no guaranty that any given project reaches completion without impact. Even “small” impacts from slower permitting and funding approvals have ripples that can impact the ability to get paid. No construction business can survive long without timely cashflow from its receivables.
Some of the converging clouds like Covid-19 health impacts and the wholesale disruption of the economy could not have been foreseen earlier when we were doing our blog series on protecting the rights to payment in construction. Add the growing risk of business bankruptcies, the ending of stimulus money and the disruption of supply chains. Industry surveys by the Minneapolis Federal Reserve Bank reveal a continued nervousness about construction industry conditions by fall. Now add the ingredient of recent civil unrest, and the clouds get even darker which endangers ongoing construction and the flow of vital cash.
Understanding and protecting the ability to claim a lien for labor and materials in construction needs to be a central focus to protect that flow of cash. It is important to keep in mind that the ability to claim a lien provides a kind of collateral for the vast sums of credit that suppliers, subcontractors and contractors contribute to funding construction from one day to the next. Imagine what would happen to construction if that pool of credit was not available and a project owner had to pay cash for labor and materials daily. Screeching halt.
The ability to look to lien rights–done right– is a way to say yes to that next project without taking on existential risk to your company from late payment or even non-payment. Protecting lien rights is a process and not an event. That process starts at the very beginning of a job with good project information about the project, the players, project financing and the property involved. Contractors need to take full advantage of contract language giving the right to project funding information. Early attention to preliminary Notice to Owner requirements is also a must for smaller commercial construction and tenant work. The time for Notice begins to run from first work for subcontractors and suppliers.
As cash gets tight contractors also need to keep the Minnesota construction trust fund law in view. Misdirection of trust funds can bring on a whole new level of misery.
Liens must be recorded and served within 120 days of a documentable last day of work and foreclosed within one year of that date. In most states, a Bankruptcy filing on the project does not prevent the recording of a valid lien but would halt foreclosure pending a lifting of the Automatic Stay.
Actually, having to record a lien is certainly not the goal of any contractor or supplier. Paying attention to the steps necessary to preserve the ability to record that lien is an important goal and it is time now to recognize a clouded environment in which payment risk is increasing. Take steps now to crank up attention to those lien fundamentals. The future of the company may depend on it.