Does a preliminary notice encompass future value on a project?  

 

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My company is a material supplier. We mostly resell construction materials and re-rent equipment (we don't own the equipment, so we don't considered ourselves the lessor). We have a lot of projects that go on for longer than expected. Customers may only plan to get materials or equipment from us for a few months, then it turns into us supplying for the entire project. Sometimes this involves new delivery dates with more material being supplied, and sometimes it's the same equipment on the job site that stays for longer. In my research I could only find some pretty gray information saying that you can't send an additional preliminary notice if the cost increases, but you're protected as long as your first estimate was "in good faith." (This is in California) 

An example, someone rents a message board for a project, so we send them a preliminary notice for a few thousand dollars, with the description being just that message board. The project continues to go on and they rent more boards, more construction equipment, etc. Sometimes a month long rental can turn into a year. So obviously, the few thousands of dollars turns into tens of thousands.

Are we still protected from that preliminary notice we filed? We estimated what we thought the job would be, a few thousand dollars, but it turned out longer. If we unfortunately needed to file a lien, would we still be able to collect all of what we're owed? Should we overestimate our preliminary notice instead? We obviously don't want to make a new project every month to send a new preliminary notice (and I don't believe we're allowed to do that either).

Thanks in advance

 
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That's an excellent question - and you're not alone. We hear about situations like this one all the time.

First, in the vast majority of situations, sending an updated, revised, or additional preliminary notice is not required. zlien discusses that idea in-depth in this article. Arizona happens to be a state where preliminary notice must be updated once the price exceeds the original estimate by a certain margin (20%), but that's the exception to the general rule. As also noted in that article - some believe the rule also applies in California, but that's not the case.

Ultimately, taking a step back to look at the purposes of notices and the nature of the construction industry can help to make sense of this. From an owner or contractor's perspective, the main purpose of preliminary notice is so that they're aware of who's working on their job and what they're doing there. The amount of the work to be performed and the precise work to be performed is somewhat secondary. Looking to the nature of the industry - price changes, change orders, etc. are the norm. Fluctuation will happen on every single job, and having to send additional notice each time there's a change would be horribly burdensome. Even in a state where additional notice is required, that notice isn't required until a 20% increase!

Still, when the terms of the original agreement change and the price increases, it's important to document that. Because, if the time does come to file a lien, explaining the increase in price from the notice originally sent will be very important. Otherwise, it might appear that the lien has been exaggerated.

Regarding California specifically - you were spot on. § 8202. (a)(2) of the California Civil Code requires a preliminary notice include "An estimate of the total price of the work provided and to be provided." As long as the preliminary notice includes that estimate, and as long as the estimate is made honestly and in good faith (i.e. without the intent to manipulate or somehow deceive the recipients of the notice), the preliminary notice will preserve the right to lien amounts later on, even if those amounts differ from the amounts included in the notice. But again - documenting why the amounts owed on the project exceed the amount included on the notice is very important in order to support a potential lien claim later on.

Hope that was helpful (if not a little long winded  😆)!

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Thanks so much Matt!

Of course!

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