The construction industry is notorious for having payment issues. Not only do many contractors, subcontractors, and suppliers struggle to make ends meet from low-profit margins, they also have difficulties actually getting paid on time and in full. If you are a construction contractor in California, you are most likely familiar with the frequent payment delays and disputes that most of the time feel like the norm rather than the exception. Unfortunately, you're not alone.
Payment issues are a challenge to construction firms all across the globe. The persistence of payment issues lies in the structure of construction projects. The construction industry runs on contracts and a single construction project can have multiple contracts agreed upon and signed by multiple stakeholders. These contracts are usually the most cited documentation in payment disputes, especially when one party claims the other did not perform satisfactorily what was agreed upon.
Aside from this, the construction industry also follows a hierarchical payment structure. Payment accountabilities start from the top of the chain, which includes the property owner and the general contractor, down to subcontractors, sub-subcontractors, and suppliers. Payment issues will sometimes trigger a domino effect where a contractor who was not paid may also withhold payment from their own subcontractors or suppliers until they receive their payment.
For these reasons, it is important that contractors be proactive in protecting their income. Plenty of risks in the construction industry can affect your ability to earn money so it pays to be prepared if any issue arises. Here are some ways California construction contractors can safeguard their income.
Given the nature and economics of the construction industry, the law provides a means to protect contractors from nonpayment in the form of mechanics liens. A mechanics lien is a legal claim filed by a contractor or a supplier against a property to claim the outstanding payments for the work they provided or materials that they furnished for the property.
A mechanics lien works like a home mortgage loan. A lender agrees to extend a loan to a borrower and in exchange, the borrower agrees to put their home as collateral until the loan is paid. A mechanics lien, however, does not need the consent of the property owner to put a security interest on the property.
When mechanics lien requirements are met, it will put a public record on the property's title that prevents the owner from selling or refinancing it. This encourages property owners to settle whatever payments are outstanding and get the mechanics lien released. If the payment issues are not settled after the deadline, the court will order a foreclosure of the property and the proceeds of the sale will be used to satisfy the debts by order of priority.
Along with other states, California provides specific guidelines that contractors need to meet before a mechanics lien becomes enforceable. Be sure to read the state's lien laws, especially those regarding preliminary notices, to ensure that your payments are protected.
Income Protection Insurance
As a construction contractor in California, you face very real dangers while working on the field. There are risks of suffering debilitating injuries or illnesses that prevent you from performing your work duties. This is why income protection insurance is important.
Also known as disability insurance, income protection insurance ensures that you will be able to support yourself during a short-term or long-term disability by providing a monthly income usually around 60% of your usual monthly payment. Having income protection insurance should be mandatory especially if you are self-employed or cannot depend solely on your employer's sick pay.
A payment bond is actually a type of surety bond, which is an agreement between three parties—a principal, usually the contractor; an obligee, usually the property owner; and a surety, an insurance company that guarantees that the obligation must be performed. As a surety bond, a payment bond is usually required by property owners to ensure that the contractor is able to pay their subcontractors and suppliers. If you are a construction contractor working under a prime contractor, you can safeguard your income by ensuring that there is a payment bond for the project.
Payment issues will always be present in the construction industry. But as long as you are diligent in protecting your construction income, you will be able to deal with financial setbacks effectively.