Little things in life are often the greatest cause of pain and frustration. This is true when it comes to construction, just ask anyone who has failed to file a Notice of Commencement. Such a simple document, but when overlooked it can lead to financial and legal hurdles in the form of mechanic's liens. Protect the integrity of your job's cash flow and profitability by understanding the Notice of Commencement laws in your state. Now let's dive a little deeper into understanding the Notice of Commencement.
What is a Notice of Commencement
The Notice of Commencement helps all parties involved in a construction project - the owner, the general contractor, subcontractors and material suppliers - establish when the project begins.
This document designates the formal beginning of a project. Not all states require this process, but for those that do, filing a notice of commencement will impact the lien rights process on the job.
In simple terms, it tells all parties supplying labor and/or materials to a construction job that they need to give notice to the owner / general contractor or lien rights will be limited. Let's take a look at an example on how this limitation would look to a subcontractor.
A new office building is being constructed and the proper notice of commencement was filed with the local government. Construction progresses and the project is being dried in with the final installation of the roof. The roof work was subcontracted out by the general contractor to ABC Roofers Inc. ABC Roofers purchased their roofing material from XYZ Roof Suppliers Inc. ABC Roofers applies for the final application for payment from the general contractor and receives payment. XYZ Roof Suppliers, however; is still owed money, but they failed to notify the general contractor. Since the funds have been paid to the subcontractor, the material supplier now has a claim with the subcontractor and cannot lien the job.
The Benjamin Franklin quote below applies to the notice of commencement process in that the little things matter. It's crucial for all parties to understand this process and it will only take XYZ Roof Suppliers one time to learn the lesson of not notifying the general contractor when materials are supplied!
“Beware of little expenses. A small leak will sink a great ship”
States with a Notice of Commencement Process
Only a select number of states have a notice of commencement process, and like with anything to do with state and local governments, the process varies from state to state.
Below are the states that have legal notice of commencement procedures.
States that require a Notice of Commencement
States with an optional Notice of Commencement
- South Carolina
- South Dakota
Who Files the Notice of Commencement
Now that you know those states that have a notice of commencement process, it's time to figure our who files.
The owner of the project, owner representative or the general contractor are parties that will file the notice of commencement. They file the notice where the project is located.
Filing Timelines for Notice of Commencement
The timeline for filing a notice of commencement varies based on the location of the project. One thing is constant though, the filing is early in the project and often before work starts.
With the filing deadline being on the front end of the project, start gathering the necessary information as soon as you can. Compile a list including:
- Legal description and physical location of project
- Owner's name and information
- General Contractor name and information
- Payment and Performance Bond Surety information, if required per the contract
- Construction lender information
- Scope and schedule of work to complete
Ensure that the information is clear for where notices should be received. It is not helpful if your accounting department is setup to receive notices but the notice of commencement does not indicate the address and department name.
Once you have filed with the appropriate government office now you must post the notice of commencement on the job site. A great place is the job trailer, especially if you have schedule meetings with subcontractors and suppliers in the trailer. Make sure the posting is in a conspicuous place.
What Happens When You Fail to File a Notice of Commencement
When a notice of commencement is not filed, it opens the owner and general contractor to both a potential financial and legal battle.
In our previous example with the roofer, if no notice was filed, the roofing supplier still has the opportunity to seek payment from the general contractor. If they are unsuccessful then their next line of defense is the mechanic's lien. This ends up with either the general contractor double paying for roofing supplies just to satisfy everyone or they end up in a legal battle, which always get expensive quick.
Not to say the lower tier subs have the upper hand when a notice is not filed, but the general contractor now has to be aware of all people that are working on the job or supplying materials. Completing a construction job on time and within budget is a monumental task, a project manager and superintendent do not need the added layer of keeping a daily log of everyone on the job site.
Lastly from an owner's perspective, when a general contractor has a lien filed on the job it always brings up a little doubt as to how the company operates. Are they paying all their bills? Do they treat all their subs and suppliers this way? Who else is out there that might pop up and jeopardize the project finishing?
Filing the notice will streamline the payment process and provide comfort for all parties involved.
The notice of commencement is a simple document with big implications. A successful construction project is built with a team spirit, unfortunately disagreements over money can derail forward progress quickly. The process is put in place to avoid those disagreements and draw a clear picture on payment from the general contractor to the subcontractor to the supplier. Check your state requirements on this process, implement if necessary, and let you focus turn toward the successful completion of you project.