When Customers Pushback on Preliminary Notices

Preliminary notices should not be overlooked in the complex world of construction and project management because they serve as the crucial foundation upon which the entire payment process hinges. A preliminary notice serves as a notification to the owner or general contractor of a construction project to notify them that a contractor, sub-contractor, materials provider or other party is reserving their right to file a mechanic's lien in the event of non-payment. But some customers may pushback if you they are served a preliminary notice.

"Sometimes a customer can get frustrated because once it's served, it's served to everyone," said Chris Ring of NACM's Secured Transaction Services. "But once the owner gets the notification, they move the money down the ladder of supply, which means that the customer gets paid faster and can, therefore, pay the credit professional faster as well."

Customer pushback on preliminary notices has a lot to do with the type of industry and job. "In our industry, being HVAC, it depends on the type of job," said Jayce Alfonzo, CCRA, CBA, senior credit manager at Watsco, Inc. DBA: Carrier Enterprise (Orlando, FL). "A new construction job is quite different from a residential changeout. There's pushback in the event that they haven't filed a permit or gotten paid upfront for the jobs and will be hesitant if a supplier filed a notice to the owner on projects. There's more pushback on smaller scale jobs than larger projects."

The customer could feel offended when served a preliminary notice and to try to force the company to stop, which means the credit manager has to help them understand it further. "The customers who do a mixture of residential and commercial work seem to be a little more unsure about preliminary notices," said Alissa Brown, credit manager at Koch Air LLC (Evansville, IN). "They see the notice and immediately think that means we're putting a lien on the property even though we always let them know upfront what the expectation is so that they can let their owner know so that nobody is surprised when the notice is actually served."

When the serving of a preliminary notice is objected by your customer or your sales team, it's always best to have a clear policy as to when a notice needs to be filed. The need to serve a preliminary notice is normally based on two factors, the risk of the customer and the amount of credit extended on a job account.

Risk of the customer examples:

• Brand new customer
• Customer with deteriorating financials
• Returning customer with a track record of slow pay and/or write-off
• Second or third generation taking over the business
• Principal contact with the customer is looking to retire
• Customer is looking to sell the business
• Customer is expending rapidly
• Customer is expanding into other trades (example, they've only done HVAC work, now they are doing electrical)

Risk of the amount of credit extended on a job account:

• Industry average is to serve preliminary notices on all job accounts over $10,000. Every company must develop its own threshold, so collaborating with sales regarding that job account dollar amount is helpful.
• Once you've established a policy regarding when preliminary notices must be served, then you're able to manage this process by exception. The exception could be that a preliminary notice should be served by your policy but will not be served based on an exception granted by someone in authority such as the sales manager.

Miscommunication can often get in the way of a preliminary notices, especially for customers who are not keen on paying you back. "We had a customer on a private job who made payment arrangements that would take us out past our lien period," Brown said. "My company turned to NACM's STS for help in sending a preliminary notice to our customer. A week later, the customer became upset at the prospect of us placing a lien on the equipment, even though they had arranged a payment plan. We agreed to proceed with the lien, with the understanding that if they completed their payment arrangement sooner, we would file a release of the lien. If there were any issues with the bank, I offered to explain the situation. However, the customer declined my assistance, likely because they had already been paid the amount a couple of months ago but chose not to pay us for the equipment."

In the end, it's best to do your due diligence and collect as much information on the project to provide that security. "If we file a preliminary notice to the owner, we run industry reports on the general contractor and look at the actual job and see if other industries file liens or any concerns," Alfonzo said.

It's also important to remind the customer of the benefits of serving a preliminary notice. "The main advantage is that we can establish lien rights as security for them," Alfonzo said. "I do not think there's any disadvantage as it helps both parties. For us, it provides security on our receivables if we can file a lien on a project." 

-Jamilex Gotay, editorial associate