The material supply business can be tough. To begin with, it’s very cyclical, just like the construction industry overall. If you’re not careful, a sharp economic downturn could leave you sitting on a mountain of difficult-to-sell inventory. Plus, you’ve got to deal with a constantly changing, price-driven marketplace that might include new tariffs, new taxes, as well as any number of other changing regulations.
While we’ve written extensively about material suppliers and their payment issues in the past, we’ve never discussed two-tier distribution in the material supply business. Please read on for a brief discussion of two-tier distribution and how this distribution model might affect lien rights.
What Is Two-Tier Distribution?
In a two-tier distribution model, resellers purchase products through a distributor as opposed to directly from the manufacturer. However, in the construction business, the “reseller” is going to be the material supplier, and the “distributor” would be known as the supplier-to-the-supplier.
How Does 2-Tier Distribution Affect Lien Rights?
In short, the effect that 2-tier distribution might have on lien rights is directly related to “project role.” (Project role is a term that’s used as a way to classify each participant on a construction project. Potential roles include the general or prime contractor, a subcontractor, material supplier, equipment renter, and so on.) Generally speaking, material suppliers usually do have lien rights on most projects, although they must be careful since material suppliers are almost always required to send a preliminary notice in order to secure their lien rights.
However, as we’ve written about before, material suppliers that sell to other material suppliers – otherwise known as suppliers-to-suppliers — typically do NOT have lien rights on a construction project.
This means that in a two-tier distribution model, the distributor assumes the role of the “supplier to the supplier,” and this means, generally speaking, a distributor that’s a part of a two-tier distribution model will NOT have lien rights on a construction project.