Before getting into the ins and outs of lien strategy, it’s important to note that filing a lien is only one step in the process of lien rights management, and lien rights management is just one aspect of credit management and receivables policy for construction companies.
The Levelset methodology: Protect, Monitor, Warn, Secure, Enforce, outlines the fundamental concepts of a proper lien strategy. Every project a construction industry participant is involved with should be “Protected.” That does not mean liens are required for every (or even most) projects, it means that the lien rights of every project should be managed so that those rights remain in a secured position. Construction firms participating on a project should take care to promote own visibility to the other project participants that are above them in the payment chain.
Only a small portion of projects and invoices ever reach the “Secure”, or lien filing, stage of the methodology. In a recent internal survey, Levelset found that roughly 2.5% of projects that send pre-lien notices ultimately require liens to be filed. This is good news for construction companies because it means that 97.5% of projects are paid before a lien is required when the methodology is followed. In fact, when preliminary notices increase, the number of required liens decrease. Sticking to a thorough lien policy – including sending preliminary notices on every project – limits the number of liens required to collect payment on every project.
This is true even if preliminary notices aren’t required for a specific project. While a lien may still be filed on these projects if a preliminary notice isn’t sent, that amounts to replacing an engine instead of checking to see whether the car just needed an oil change. In many instances, the visibility provided by sending preliminary notices is all it takes to get paid. GCs and Owners are generally fair-minded, just like the subs and suppliers working on their projects. When a specific sub or supplier makes it known that they are on the project – it’s much more likely that that party will be paid.
Free Payment Rights Advisor Tool from Levelset
One of the most important questions about lien rights concerns whether a potential claimant even has the right to file a lien in the first place. What happens if filing a mechanics lien isn’t an option? What are some other actions to take when you’re having a payment issue? We have a free tool that will help you with these questions. It’s called the Payment Rights Advisor. It only takes a couple of minutes — just answer 5 quick questions about your job, and the Payment Rights Advisor will give you all of your best options, including whether or not you qualify for mechanics lien rights.
Why Have A Lien Strategy?
The question posed by this heading has a very simple answer: To get paid.
A lien strategy bolsters and optimizes a company’s receivables through several channels, and each of these channels is geared toward accomplishing one thing: getting companies paid, and getting them paid more quickly. Five of the primary functions of a lien strategy are outlined below:
- Protects the right to file a lien
- Prioritizes invoices
- Holds customers accountable to a timeline
- Provides visibility and gives customers opportunities and reminders to pay
- Optimizes the receivables process
1. Protect The Right to Lien
A lien strategy’s strength comes from leveraging the power of the mechanics lien. Therefore, protecting the ability to file a mechanics lien is the most important objective of a comprehensive lien strategy.
When labor and/or materials are furnished to improve real property, the party furnishing the labor Sandor materials is granted the ability to file a lien to secure payment. Unfortunately, however, there are a few things complicating this process. Every state has rules and regulations regarding the filing of mechanics liens, and these specific requirements all differ from state to state. If preliminary notice or notice of intent to lien deadlines are missed, a potential claimant may be prohibited form filing a lien entirely.
Sticking to a proper lien strategy ensures that the ability to file a valid lien is never lost.
2. Prioritize Invoices
Implementing and following a lien strategy is a sign that a construction industry participant knows what they are doing. Being savvy enough to send notices at the proper time, even if not specifically required, makes it known that the sending party is serious about getting paid.
Additionally, sending notices makes a top-of-the-chain party aware that the noticing party is able to file a valid mechanics lien if push comes to shove. Besides that, however, sending notices provides visibility to the parties that need to know. With the myriad companies involved on a construction project, many times certain subs and suppliers are not even known to the GC, let alone the property owner. By sending a preliminary notice to these parties, every project participant can make sure that they are not overlooked.
3. Timeline for Payment
Just like with any invoice, requests for payment in the construction industry are often met with foot-dragging and excuses. How many times have companies been given the “the check is in the mail” excuse”. Having a lien strategy, however, makes it so that there is little doubt as to the timeline of payments.
Notices and liens have deadlines related to certain project dates, including the start or end of the project as a whole, or of a particular participant’s contributions to the project. These lien and notice deadlines are visible to both the payor and payees, and they create a concrete timeline that can be used to encourage timely payment.
4. Visibility and Reminders to Pay
Following a lien strategy is not an adversarial strategy. In fact, it’s a service to the top-of-the-chain parties. As noted in the “Prioritize Invoices” section, above, there are many times that a GC or property owner doesn’t know the majority of the project participants. The very nature of construction projects creates situations in which the tangled structure makes it impossible to know who’s who and what’s what.
Sending preliminary notices informs the parties closest to the money that a particular party is on the job, and doing work. That way, if there are payment hold-ups down the line, the proper parties are aware of the work performed by the party giving notice.
5. Optimization – Save Time & Money
Finally, a lien strategy developed and followed via technological assistance can help companies become more efficient with their entire credit management process. By leveraging technology to learn the specifics as to when and on which projects giving certain notices creates the best results, companies can optimize and streamline their credit and collections processes.
Making smarter decisions helps everybody, and gets everybody paid fairly.