A Complete Guide to Filing a Stop Notice, Construction Payment Issues, and Knowing Your Rights
Contractors and suppliers know all too well how difficult it can be to get paid in the construction industry.
Payments are often delayed by weeks, and sometimes even months, as a result of:
- Human error
- Lost or incorrect paperwork; or
- Mismanaged funds at the hands of owners and GCs.
However, there are avenues that contractors and suppliers can take to ensure payment for work completed, one of which is the stop notice.
Construction workers in four states have the right to stop lenders from issuing additional funding until completed project work is paid.
In this guide, we share everything you need to know about:
- Your rights as a contractor
- How you can get paid faster; and
- When you should consider issuing a stop notice on your project.
Flexbase App: Payment Solutions For Construction Companies
Getting paid in the construction industry can be a major source of stress for contractors.
Unfortunately, it’s all too common for contractors to wait up to 90 days before receiving payment, which can cause huge cash flow issues.
Flexbase offers contractors and construction companies an all-in-one payment automation platform.
With a Flexbase subscription, contractors can:
- Track projects
- Request payments; and
- Automate all of the paperwork involved in a payment application — including stop notices.
Flexbase not only streamlines your entire billing process, but also integrates with your existing project management software, accounting programs, and ERPS.
Plus, membership to the Flexbase platform and resources is entirely free.
Don’t pay for expensive monthly or yearly subscriptions when Flexbase operates on a small commission of only 0.5%.
That means, if you don’t get paid, we don’t get paid.
What is a Stop Notice?
Simply put, a stop notice places a lien on funds not dispersed by the owner or lender on a construction project.
When a claimant has not been paid for work completed, a stop payment requires the owner or lender to withhold funds from a GC or other contractor until the claimant receives payment.
A stop notice may also be referred to as a “stop payment notice” or a “stop lending notice”.
How Does a Stop Notice Work?
Once issued, a stop notice freezes a part of the funding meant for other contractors and suppliers on the job.
This disruption of payment acts as an incentive for owners and GCs to step up and resolve the non-payment issue before it causes costly delays in the construction project.
Is There a Difference Between a Stop Notice and a Mechanics Lien?
While a stop notice can be an effective way of incentivizing owners and GCs to pay subs and suppliers on a job, it does not place any lien on the property and is not filed in the property records.
A stop notice is served directly to the...
- Lender
- Owner; or
- Public entity
...and demands that the lender withhold enough funds to make a payment on the claim.
So, if an owner or lender has already paid then the stop notice has no affect.
If the owner or GC is in possession of the funds at the time of the claim, then they become solely responsible for paying the claim if funds have already been dispersed to other parties.
In order to prove that the notice was provided to the necessary parties, proper records of the stop notice should be maintained by the claimant in the event that the claim goes to court.
A mechanics lien, on the other hand, is a lien on the construction property and will stay in effect until the claim has been paid, or in the case of a resulting lawsuit until a judgment is made and the property is sold.
Who Can Issue a Stop Notice?
Anyone with mechanics liens rights can issue a stop notice.
This includes:
- Materials suppliers
- Contractors
- Subcontractors; and
- Anyone else on the job site with legal rights to issue a lien.
What Information Must be Included in a Stop Notice?
The information that must be included in a stop notice consists of:
- Name of project owner
- Name and address of contractor and lender
- Description of work completed
- Project location
- Name of the person who contracted the work
- Estimated total price of the completed work
- Amount demanded by claimant after any deductions
When is a Stop Notice Most Effective?
When you are unable to file a mechanics lien, for any reason, and you work in a state that allows stop payment notices it can be a very effective tool for speeding along the payment process.
It may also be beneficial when sent in conjunction with a lien as it increases the incentive for all parties to resolve any non-payment issues when both the funding and the property have been affected.
When Must a Stop Notice be Issued?
Stop notices must be issued and served within the same timeframe that a mechanics lien is expected to be issued.
In most cases, the time frame is 120 days after completion of work has occurred.
However, as we noted previously, it’s important to remember that a stop notice does not provide security in the property, and the property owner is free to do whatever they please with the property with or without the stop notice.
Flexbase payment automation helps to alleviate the need for issuing a stop notice or a mechanics lien by sending regularly scheduled invoices to all parties involved in the construction project, not just the payor.
Our invoices are sent via email and can be paid with the click of a button, making it easy for owners and GCs to quickly pay. See below.
Not only will we send invoices on your behalf, we include all the documentation required as per your contract, ensuring that there is nothing that could prevent payment from being made.
Flexbase streamlines the entire payment process so that you no longer have to:
- Wait on funds
- Send notices; or
- File liens.
It’s a win-win and it’s absolutely free to use.
Are There Any Limitations to a Stop Notice?
Stop notices are not available in every state, unlike mechanics liens and bond claims.
For this reason, claimants must be cautious about sending a stop notice since most states have no law that obliges lenders to stop payment.
Since the stop notice simply has no effect, it’s not only a waste of time and resources, but it can also be a detriment to a claimant’s right to file a mechanics lien within the legal deadlines, especially if the claimant is relying on the protection of that stop notice.
In Which States Does a Stop Notice Apply?
There’s no point in filing a stop notice in a state where stop notices laws don’t apply, but it’s important to know that state laws where stop notices do apply are constantly changing.
Always consult with current laws before filing a stop notice.
Currently, only...
- Alaska
- Arizona
- California; and
- Washington
...allow stop payment notices, and each has specific requirements in order for the stop notice to be effective.
A stop notice in Alaska gives unpaid suppliers or contractors the right to interrupt (or stop) construction funding on a project until payment is received.
Lenders or owners are required to withhold the past due amounts that have not been paid to the claimant.
Stop notices only last 91 days from the date the lender or owner receives the notice unless the claimant files a suit on the claim.
If the claimant fails to file suit or revoke the stop notice, then the lender’s liability is terminated.
In Arizona, a stop notice may be filed on most private projects, with the exception being an owner-occupied dwelling.
Stop notices can be issued by anyone who is legally entitled to file a mechanics lien on a construction project.
But, this right is revoked in Arizona when a claimant fails to file a 20-day preliminary notice.
It’s important to note that any claimant with the right to serve a mechanics lien, and who is not the general contractor, can serve a stop notice on a construction lender or property owner.
General contractors may only serve a stop notice on the lender.
In California, stop notices are used when no bond exists for public construction projects. Stop notices come in handy because they act as a lien on public funds.
Once a stop notice is issued, the public entity is required to withhold the amount equal to the claim for nonpayment.
However, California requires a 20-day preliminary notice to be sent and a stop notice must also comply with form requirements.
Stop notices must be sent by certified mail to the public entity contracting the work as well as the general contractor.
The notice must be issued by whichever of these two dates is earliest:
- 30 days from the recorded date of the Notice of Completion; or
- Within 90 days of the completion date if a Notice of Completion was not recorded.
In Washington, a stop notice can be used on all public projects and private projects for which there is a construction lender.
However, a preliminary notice is required before sending the stop notice to secure mechanics lien rights.
Preliminary notices should be sent as follows:
- On a private project:
- Within 60 days
- To the owner and the general contractor
(Note that on a single-family dwelling, preliminary notice should be sent within 10 days of delivering first labor and materials).
- On a public project:
- Within 10 or 60 days
- Late notices are not accepted
- To the general or prime contractor
While a specific construction stop notice form is not required in Washington, it should be known that particular information and language is necessary.
Consulting up-to-date laws before issuing a stop notice is advised as inadequate information may be grounds for invalidating the notice.
Most contractors are well aware of the major cash flow issues within the construction industry.
In 2019, slow or delayed payments cost construction companies $64 billion, and contractors waited, on average, 50-75 days for payment.
For small and midsize construction companies, this can cause huge problems with business expenses such as payroll and materials.
But still, nobody wants to get caught up in the legalities of money collection.
Luckily, Flexbase customers reap the benefits of a completely streamlined payment process with our integrative software that gets our contractors paid sooner with automated tools such as:
- Project tracking
- Payment applications
- Legal reminders; and
- Much more.
Need cash fast?
Rather than digging into your reserves and paying upfront, our construction funding provides cash flow relief by spreading out the cost of needed labor and materials for your business over time.
Flexbase automatically pre-approves customers because the information that would normally take the banks weeks to sift through and approve, has already been sent to our lenders.
With a Flexbase subscription, customers can enjoy:
- Instant pre-approval for all construction loans
- Preferred interest rates
- No down-payment; and
- 24-hour turnaround on cash deposit.
Schedule your free demo and see how Flexbase puts money in your pocket faster and avoids the need for a stop notice, construction slow-downs, and legal fallout.
