Finishing a construction project without a lien claim is everyone’s financial goal, and each party has a role to play. With a little homework, good communication, and proper documentation, mechanics liens are entirely preventable. This guide will give property owners and contractors clear steps they can take on a construction project to make payment happen and avoid mechanics liens.
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Nobody likes mechanics liens
Mechanics liens are a challenge for everyone involved on a construction project. Property owners want the job to go smoothly, minimize the project cost, and keep their titles clear.
The people who are actually improving the property – contractors, subs, and suppliers – feel the same way. They would rather get paid on time and move on to the next job. Everyone wants to avoid the hassle of filing a mechanics lien or trying to get it released.
How property owners can avoid mechanics liens
There are a number of steps that a property owner can take to reduce or eliminate the chance of a lien claim on their property. Most of these steps to prevent mechanics liens boil down to one thing: communication. While some may require some extra legwork or additional cost, the steps can save smart property owners time, money, and stress in the end.
Prequalify the General Contractor
Before owners settle on a contract with a GC, put them through a prequalification process.
Start by researching a potential contractor’s past payment practices. Discuss their payment plans, and what steps they take to make sure all sub-tier parties get paid. Check into the other jobs they’ve been the prime contractor on. This will give the owner some insight into their organization and tactics, and whether or not they’re likely to miss a payment and put their property under contention.
Require the GC to collect preliminary notices
When an owner receives a mechanics lien from a subcontractor that they didn’t know existed, it can be incredibly frustrating. Owners should require the GC to collect preliminary notices from all subs and suppliers on the job.
Preliminary notices allow the owner to keep track of all of the people working on the job that need to get paid. This helps the owner ensure that payments occur on time to each party on the project.
Require GCs to collect conditional lien waivers with pay applications
Owners should make it clear that contractors need to submit conditional lien waivers with their pay apps. This is a fair practice for every party on a project. Subcontractors and suppliers should be happy to provide conditional waivers, because they only waive lien rights once payment has been received. A signed conditional waiver protects the property from the threat of a lien once payment is complete.
It’s unlikely that an owner will receive pushback for implementing conditional lien waivers, as the waiving party is happy to receive their payment.
Protect everyone by issuing joint checks
Joint checks are an excellent way to avoid mechanics liens and prevent double payment. When payment is issued with a joint check, all parties involved need to endorse it before funds are released. For example, a subcontractor and their supplier could be parties on a joint check. If that’s the case, before the subcontractor can cash the check, the supplier needs to endorse it.
This nearly ensures that the sub will pay the supplier. This helps to avoid the supplier from filing a mechanics lien against the property for nonpayment.
Require the GC to secure a payment bond
Payment bonds protect the property owner by taking the place of the property for the purpose of a claim. A payment bond transfers the risk of non-payment from the property to the surety that issues the bond. If a subcontractor or supplier doesn’t receive payment on time, they can make a claim against the bond.
Securing a bond could potentially increase the GC’s contracted price, but it will allow subs and suppliers to levy a claim against the bond rather than the property. Payment bonds help the property owner to prevent mechanics liens from the start.
File a Notice of Completion
Some states give extra protection to property owners who file a Notice of Completion. This notice informs all of the parties with mechanics lien rights of the project completion. In addition, the Notice of Completion reduces the deadline for unpaid parties to file a mechanics lien. In states that use this notice, filing a notice of completion will drastically reduce the risk of mechanics lien claims.
Pay on time & pay in full
I put this one last because I fully expect that you already know this! But this article wouldn’t be complete without the reminder. Timely payment is the most essential way for owners to avoid mechanics liens. A mechanics lien is tool for contractors and suppliers to use if they don’t get paid. Paying them on time for the work they perform is the #1 way to ensure that they don’t use that tool against you.
Every step you can take to ensure that the parties on your project are paid on time and in full will pay off in the long run. If owners are cutting checks in a timely fashion, it eliminates the basis for mechanics liens to be filed.
How contractors can avoid filing a mechanics lien
Contractors want to avoid filing a mechanics lien just as much as a property owner wants to avoid receiving one. In order to get paid on time and prevent the need for a lien filing, contractors need to focus on protecting their payments and communicating effectively with the GC and property owner on their jobs.
Safeguarding their payments with the appropriate documents and procedures actually lessens the chance that they’ll have to file a mechanics lien. Essentially, the contractor can lay out the rules for everyone to play by, ensuring everyone plays – and pays – nicely.
This might sound a little bit counterintuitive. How can a contractor avoid mechanics liens by protecting their right to file a mechanics lien? It’s actually pretty simple. It might be easier to think of each document that you use in the mechanics lien process as a communication tool. Every step in that process – every document you send – serves to notify the property owner or GC about the payment problem. After each step, they have a chance to rectify the issue, submit payment, and avoid a mechanics lien.
Choose your projects wisely
Contractors should vet their customers the same way that customers vet them. Checking into the hiring contractor’s past payment practices gives a subcontractor or supplier a quick look into the crystal ball of payment timeliness. If a customer’s history is riddled with mechanics liens and nonpayment action, it’s a good idea to avoid that contract.
Send preliminary notice on every single job
It doesn’t matter if they’re required by state or not, preliminary notices need to be a staple in a contractor’s protection plan.
A preliminary notice (sometimes called Notice to Owner, prelien, or Notice of Furnishing) serves a few purposes. In the event that the GC or owner isn’t familiar with their presence, preliminary notice provides a professional introduction for the contractor. In most states, they protect the contractor’s right to file a lien. Owners and GCs know this.
A preliminary notice is a great way to show that a contractor is on the job and knows their right to fair and timely payment practices. That preliminary notice will help the contractor get paid faster, avoiding the need to file for a mechanics lien in the first place.
Start sending conditional lien waivers with payment applications
Owners and GCs love lien waivers. Subcontractors that understand how they work love them too. Of course, that understanding is important. Lien waivers can be tricky, and contractors that don’t use waivers correctly can give up more rights than they bargained for.
A conditional lien waiver is a metaphorical worm on a hook. The owner sees the worm (waiver of lien rights on receipt of payment) and bites, leaving you with the catch (payment). Conditional liens waivers protect the owner upon payment, increasing their willingness to pay you sooner.
Pay applications and lien waivers work together to help contractors get paid faster. Practicing catch-and-release will help to ensure further timely payments in the future. A conditional lien waiver helps you catch payment faster, and it helps the owner by releasing (waiving) your lien rights for that amount.
Send invoice reminders
The best defense against late payment is a proactive offense. Sending an invoice reminder before the payment is due is an effective, friendly way to let the hiring party know you’re expecting payment.
If you haven’t been paid, send another reminder immediately after the due date to help grease the wheels. An invoice reminder isn’t a threat; it’s simply a good communication tool. It draws attention to your expectation for payment without upsetting the relationship.
Backed by a previously-sent preliminary notice, GCs and owners appreciate invoice reminders. They’re a sign of good faith that the sub understands mistakes happen but still expects to be paid (without threatening to file a lien).
Send demand letters
Demand letters are a professional way for a subcontractor to warn the GC or owner about potential consequences if payment doesn’t come in.
A demand letter shows that a subcontractor is serious about getting paid and can be enough “bark before the bite” to get payment rolling. Learn how to write professional demand letters, and keep a demand letter template on hand to use when you need it.
Send Notices of Intent
A notice of intent to lien (NOI) is the final warning shot before filing a mechanics lien. In this way, it’s basically a demand letter that has a clear consequence for non-payment. If sending a demand letter is like a dog’s bark, submitting an NOI is like baring your teeth.
At this point, a smart subcontractor has probably exhausted all other options. The sub needs to let it be known that they’re willing and within their rights to file a mechanics lien. Some predatory GC or owners may safeguard their cashflow until they’re issued a Notice of Intent.
Only a few states require a sub to send an NOI to protect their lien rights. Even where it’s not required, an NOI is incredibly effective at spurring payment – and avoiding the need for a lien.
Avoiding Mechanics Liens is Everyone’s Responsibility
Everyone involved in a project plays a role in avoiding mechanics liens. If owners, GCs, subs, and suppliers do their respective parts, the job runs smoother, payments happen on time, and everyone walks away happy. Those parties that keep detailed documents, send the appropriate notices, and pay on time are likely to complete every job lien-free.