Here I present a short guide to material suppliers on creating a Mechanics Lien Policy for your company, ending with a sample policy for free download. While this article focuses on material suppliers, the same principles apply to subcontractors, equipment lessors, and other parties hired to furnish labor or materials on construction projects.
What Is A Credit Policy? A Mechanics Lien Policy?
According to businessdictionary.com, a credit policy is:
Clear, written guidelines that set (1) the terms and conditions for supplying goods on credit, (2) customer qualification criteria, (3) procedure for making collections, and (3) steps to be taken in case of customer delinquency. Also called collection policy.
So, if that’s a credit policy, what in the world is a mechanics lien policy?
This is actually a term-of-art I recently invented (I think) in response to inquiries from our clients about implementing procedures to help them utilize Levelset’s services and generally protect their lien rights on projects across the country.
This is something I alluded to in a previous post, “How To Incorporate Lien Protection Into Your Credit Policy – For Material Suppliers and Equipment Lessors.” The idea is that in the construction industry, there’s a huge incentive to not only stay on top of standard credit and collection procedures, but to incorporate procedures to insure your lien rights are always protected.
A Mechanics Lien Policy is just that, an overview of what procedures your company will follow to preserve, perfect and enforce its mechanic lien rights.
Elements of a Mechanics Lien Policy for Material Suppliers
When crafting a Mechanics Lien Policy, material suppliers must keep in mind the credit and collection challenges specific to their industry. We have a post about this from last week titled: Top 4 Mechanics Lien Law Challenges For Material Suppliers and Materialmen.
With these challenges in mind, here are some issues the building material supply company must keep in mind when writing a Mechanics Lien Policy.
What is The Commitment To Sending Preliminary Notices?
Material suppliers are almost always required to send preliminary notice to preserve their mechanic lien rights. The backbone of your company’s mechanics lien policy, therefore, is to dictate the company’s commitment to sending preliminary notices.
In the sample mechanics lien and preliminary notice policy that I make available with this post, I address this commitment in a section titled “Mechanics Lien Philosphy.” What goes here is a short statement about how aggressive your company intends to be with mechanic liens. Are you looking to tip-toe around sending notices and filing liens because you’re scared of making waves with your clients (see Preliminary Notices Will Not Scare Your Customer!), or are you all-in and willing to send notices every time to ensure you have the maximum protection in the event of non-payment?
Here’s a quote from our sample lien policy’s mechanic lien philosophy:
[Example for Protection on Every Project:] The company furnishes materials on a high volume of projects, with the average value of those materials being between $50,000 and $75,000. Most of the time, these materials are sent to the job site on credit. Even though the credit worthiness of our clients are investigated pursuant to the company’s credit policy, because of the high dollar value of each shipment, the company values the option of filing a mechanics lien and desires sending all required preliminary notices to preserve those rights on every project. If an account remains unpaid, the company will file a mechanics lien before the state’s mechanic lien deadline. The company does so, despite the possibility of interfering with its relationships to project participants, because its willing to compromise elements of those relationships to protect its financial interests when payments are overdue.
Some companies like to separate their projects into risk categories, and then commit to sending preliminary notices to only those designated as high or medium risk. Risk categories can be based on any number of factors including the dollar value of the account (the more you can lose, the more risk) or the creditworthiness of the client. What separates a high-risk account from a low-risk account is a call your company needs to make.
Outline A Plan for Execution
Once you decide who will get a preliminary notice and who won’t, it’s time to outline a plan to execute the policy. The execution plan should not only contemplate how you’re going to send the preliminary notices, but also how and when you will file a mechanics lien, send the account to collections, and escalate the account to a foreclosure lawsuit.
Just as you would dictate within a credit policy when demand letters are sent and collection calls are made on overdue accounts, you’ll want to establish firm procedures on when notices, liens, collection efforts, and foreclosure lawsuits go forward.
Notices: The thing about preliminary notices is that they are preliminary documents. You can’t wait until the account is overdue before sending these construction notices. You must send the notice to owner at the very start of furnishing to a project. As such, the execution plan should call on your company to send a preliminary notice immediately upon signing a new contract or purchase order, or furnishing to a new project.
Mechanic Liens: Unlike preliminary notices, mechanic liens are sent only after an account is overdue or some money is owed (with the exception of retainage). While mechanic lien deadlines are important, you shouldn’t make a practice of waiting until just before the deadline to file your lien. Not only does this subject you to error of a late filing, but you also miss opportunities to file your lien when the project is full of funding. Earlier liens perform better, just like early collection efforts are more successful.
Your company should have a set number of days you wait until filing a lien, and it should be somewhat short. Something like 30-45 days after last furnishing materials. This insures that (i) You get the lien filed while the account is still fresh, making collection more likely; and (ii) You don’t wait too long, as most lien deadlines are longer than 30-45 days.
Collections: You may have between 90 days and 6 years to have your mechanics lien foreclosed upon. Don’t wait that long. Give the mechanics lien 30-45 days to work by itself, and if it doesn’t work, escalate the situation and start collection efforts.
Foreclosure Lawsuit: Stay on top of the claim, so that if collection efforts don’t work within another 30-60 days, move the account up and require a lawsuit get filed to foreclose on the lien.
The specific number of days I propose here are just suggestions. The important thing is to find something that works for your company, and to have a systematic, consistent execution. Also, when setting your execution policy, be sure to pay attention to the next point: your deadlines.
Monitor Your Deadlines and File Your Documents Right
There are a lot of similarities between a credit policy and a mechanics lien policy. One key difference, however, is that when dealing with mechanic liens, preliminary notices and bond claims, compliance with complex legal nuances is required. There are two primary components to this legal compliance: (1) Getting everything filed before the deadline; and (2) Getting everything filed right.
First, everything in the mechanics lien world has a deadline. There’s a deadline to send preliminary notices, to file the lien, to foreclose on the lien, and more. These deadlines change from project to project and state to state, and it’s going to be impossible for your company to track these deadlines. You need a system, or to outsource your mechanics lien deadline monitoring.
Second, the notice, lien and bond claim forms and laws are hyper-technical. If you don’t complete the form exactly right, and send or file it in the exact right way, you’re going to forfeit your lien rights. You want to make sure you understand all of the requirements (which is hard, because again, they change state-to-state and project-to-project). Consider outsourcing this work. See: 4 Reasons It’s Smart to Outsource Your Preliminary Notice Work.
Finally, as promised, you can download a sample mechanics lien policy I’ve put together. It can be used by anyone in the construction industry, but I wrote it with material suppliers specifically in mind. You will notice that some items are in gray, as they present to you some choices in language. Plus, you should edit the policy to fit to your company’s goals and philosophy.
This was lesson 5 of our 12 step course on credit management.
Want to review the last lesson on credit applications? Click here.
Want to skip ahead to the next credit management course that covers collection policies? Click here.