The Material Supplier’s Guide To Creating A Mechanics Lien Policy

On January 16, 2012

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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.

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 Zlien’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 credit worthiness 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.

Sample Policy

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.

Download the Sample Mechanics Lien Policy Here:
Sample Mechanics Lien Policy And Procedures – Word Version
Sample Mechanics Lien Policy And Procedures – PDF Version

Posted in: Collection Laws & Tips, Lien Management / Tags: Credit Policy, Free Forms, Lien Policy, LienPilot, Material Supplier, Outsource, Supplier Series / Leave a comment

Use Zlien And The Lien Laws To Reduce Your Bad Debt in 2012

On December 28, 2011

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As the holiday season winds down and 2012 approaches, everyone in the construction industry is looking back on the fiscal successes and failures from 2011, and making plans for the new year. Many businesses will be staring at a mound of “bad debt,” which may be written off when tax time approaches this spring. You may be wondering, what can I do to stop accumulating so much bad debt? Let us help you plan for 2012.

The High Costs of Bad Debt?

Think you can just write off your bad debt? It’s not quite that simple. While there are certainly deductions available to you under the tax code to accommodate some of your bad debt, it’s irresponsible for you to write off uncollected receivables year after year without analyzing its effect on your company’s bottom line. Unpaid receivables even in small amounts can have a very significant impact on your company’s profitability.

Let’s say you have just $5,000 of unpaid receivables, and you have a net profit margin of 5%. Your company will need to make $100,000 in revenue to compensate for the lost $5,000. That’s a significant amount of money to offset the loss of such a small debt. Now, think about $20,000 of unpaid receivables, $100,000, or more. The impact to a company’s bottom line can be staggering.

Filing Mechanic Liens Will Get You Paid More Often

Many feel that filing a mechanics lien is too aggressive, or that it will risk impairing a relationship with a good customer. The fact remains, however, that it’s hands-down the best way for someone in the construction industry to reduce their bad debts.

A few months ago I wrote a White Paper titled: 5 Ways A Mechanics Lien Can Get You Paid. To summarize that White Paper, mechanic liens have a host of consequences to a project, including freezing funds, eliminating the property owner’s ability to sell, refinance or transfer the property, securing your debt with the project’s property as collateral, and more. When you file a mechanics lien properly and timely, an entire symphony of pressure points are pushed, and this results in getting you paid more often than not.

If you have any unpaid receivables at the end of 2011, a well-executed plan to protect and exercise your mechanic lien rights is your solution. You’ll see a huge difference in your bottom line. To take advantage of the lien laws, however, you need to follow a lot of rules. Here’s what you’ll need to know.

Part I: Protect Your Lien Rights From The Start Of Work

In creating a mechanics lien plan, the first thing you need to know is that Filing A Lien Is A Discipline, And Not A Knee-Jerk Reaction. Namely, you have to begin protecting your lien rights by filing certain preliminary notices at the very beginning of every project.

I’ve discussed preliminary notices quite a bit on this blog (see Preliminary Notices category). The long and short of these discussions is that in many states, you’re required to deliver to certain parties a notice formally putting them on notice that you’re furnishing labor and/or materials to the project. This notice is due within a certain amount of time from when you begin work, and if you miss your window to send the notice, you will forfeit your lien rights. Ouch.

If you do three, four, five some-odd projects each year, sending the preliminary notice in-house is not going to be a big deal, although you’ll risk making a mistake. However, for those companies who have a lot of preliminary notice filings each month or quarter, it’s probably a good idea to outsource this service. Knowing when a notice is required is important, as is getting the notice prepared properly and sent timely. Without it, the mechanics lien plan just won’t work. Period.

Part II: Exercise Your Lien Rights If Unpaid

So, you’ve filed your preliminary notices when required and protected your lien rights. Things have been going well, but you’ve encountered a client who is not paying its invoice. What now?

The next step is to exercise your lien rights by filing your mechanics lien. Like preliminary notices, this must be filed within a certain amount of time, which each state having different claim periods (Calculate Lien Deadlines with Zlien’s LienPilot). Liens are typically filed after you’ve finished or stopped providing services, and after an amount of money has become due to you.

Be careful when filing your lien because there are lots of traps for the unwary. In fact, you may be well served to use a service like Zlien, who will prepare, file and serve your mechanics lien for a flat fee. Once your mechanics lien is filed and served, you can then make additional attempts to collect the debt.

A lot of times, the filing of a mechanics lien alone will be enough to turn things around and get payment. If you remain unpaid, however, you’ll need to move to the final step, as the mechanic lien will not tie up the property forever.

Part III: Enforce Your Lien Rights With Suit

The idea behind a mechanics lien is that you’re constricting alteration of the property’s title in any way, so that if you’re debt is not paid you could theoretically call upon the sheriff to seize the property and sell it to pay off your debt. If the filing of the lien alone does not produce payment, you will want to begin taking steps to enforce your lien and requesting the property’s acquisition and sale.

This request is done through an ordinary lawsuit filed against the property owner (and frequently also the prime contractor and party who hired you). You’ll be required to prove that your debt is owed, and if you prevail at trail and get a judgment, the judgment would request the sheriff to proceed to foreclose on the project’s property.

This is a long road and most liens get resolved before going this far…but, you must take those first steps in the journey and understand the procedure to most effectively use your lien rights.

A Guarantee

When account receivables are at issue, it’s hard to guarantee anything. However, in my experience of helping suppliers and contractors around the country implement quality credit policies and mechanic lien plans, I can guarantee you that a well-planned and executed mechanics lien plan will nearly eliminate your bad debts in 2012 and beyond.

When thinking about a mechanics lien plan, understand that implementing it in-house will be very, very difficult. There are so many state requirements which differ depending on your tier in the project, the project type, and other variables. Keeping up with these changes and differences is impossible if you’re not in the business of doing it. Therefore, again, your best option is to outsource this stuff. And that’s a positive thing, because it means you can implement a mechanics lien plan, turn around your bad debt situation, and not create additional work for your business.

Posted in: Collection Laws & Tips, Lien Management, Our Services & Us / Tags: Bad Debt, Credit Policy, lien foreclosure, LienPilot, Zlien / 1 Comment

How To Prevent A Deadbeat Customer From Taking Advantage Of You

On November 16, 2011

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I found a pithy and pointed article on Inc.’s website providing businesses with 5 Tips to Ensure Customers Pay You On Time. The article references a RocketLawyer.com survey revealing that 25% of companies have trouble collecting payments, and of those 60% had to write off the bad debt. The Inc. writer then rattles off 5 tips to help avoid falling into these percentages. In essence, these are tips to avoid and manage potential deadbeat customers. The article summary explains: “Every business runs into deadbeat customers. Here’s how to make sure they don’t take advantage of you.

Why Avoiding Bad Debt Is Important

You probably don’t need me to explain exactly why bad debt should be avoided. Absolutely no one is a fan of bad debt. However, it is worth taking a moment to discuss the true costs of bad debt.

It’s a common misconception that the cost of bad debt equals the cost of the outstanding invoice, but nothing is further from the truth. Bad debt can have far reaching consequences, not the least of which is the need for your company to pay off the total amount of the bad debt with profits earned elsewhere. If you’re running a profit margin of 10%, and you have a $10,000.00 bad debt, you’ll need $100,000 of revenue to make up for the $10,000 lost. That’s a heavy hit to your bottom line.

General Tips To Avoid Bad Debt and Deadbeat Customers

So, what can your company do to be better at avoiding bad debt?

The Inc. article had a few tips that are worth repeating, some proactive and some reactive, as I’ll discuss in more detail below. Among the proactive tips are to perform a background check, create and sign a contract, and then bill customers consistently. Among the reactive steps are to have an attorney send a demand letter and to send the nonpaying customer to collections.

I think these are great tips, and certainly not novel collection tools. In fact, these are similiar to the tips I’ve suggested in the past within the Construction Lien Blog’s Collections category, and also on my law firm’s blog: The Construction Law Monitor.

Those in the construction industry should understand these general tips, and use them, but I have really great news. Mechanic lien and bond claim laws provide those in the construction industry with the most powerful collection tools in any industry, all explained below.

Proactive Collection Tips for Contractors & Suppliers

There are a few things contractors, suppliers and others in the construction industry can do proactively to avoid bad debts and deadbeat customers. Two years ago, I discussed this generally in a post titled: “Filing A Lien Is A Discipline, Not A Knee Jerk Reaction”. The point of the post rings true still today, which is that if you want to file a lien to protect your right to get paid (and you shoulds want this), you need to take steps at the beginning of the construction project to protect your lien rights.

In many states, this means sending a preliminary or pre-lien notice to other participants in the construction project. Your state may or may not require this, and it may or may not be required depending on your role in the project; but if you must send the notice by law, the failure to send the notice will cause you to forfeit all of your lien rights.

When looking to collect on a construction project, having lien rights can prove vital. Look at this article to learn just a few of the reasons why liens produce payment.

Aside from protecting your right to later file a lien, the act of sending your preliminary notice is actually enough to increase the odds you’ll be paid. Those companies who send notice usually are given top priority when its time to get paid, as the prime contractor and the owner know, if payment isn’t made to them, they could lien!

Reactive Collection Tips for Contractors & Suppliers

When I say “reactive collection tip,” I am talking about things you can to collect from a deadbeat customer after they have already failed to pay. Therefore, this action is in reaction to the non-payment.

And to what am I going to refer? Filing a lien or bond claim, of course.

We have a tag here on this mechanics lien blog titled “Why Lien” It’s a collection of blog posts that express why it’s important to file a lien when you’re unpaid, and within those posts we repeat this many times: Filing a mechanics lien or bond claim is the best collections tool available to you.

If your proactive measures were unsuccessful and you still have a collections problem, the best thing you can do is file a mechanics lien or bond claim. Be sure to file it timely, and be sure to get it filed correctly!

Posted in: Collection Laws & Tips / Tags: Bad Debt, Construction Law Monitor, Demand Letters, Inc., RocketLawyer, Why Lien, Zlien Collections / Leave a comment

How To Incorporate Lien Protection Into Your Credit Policy – For Material Suppliers and Equipment Rental Companies

On July 27, 2011

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To material suppliers and equipment lessors who ship thousands or millions of dollars of materials and equipment out on credit, credit policies are quite important. One component of a credit policy too often overlooked in the construction industry is lien protection. When it comes to getting paid, filing a lien can be the most effective way to prevent high receivables. Filing the lien on time and delivering all required notices is critical to preserving your lien rights, and its why lien protection measures must be incorporated into a well thought-out credit policy.

What Is A Credit Policy?

So what is a credit policy anyway? 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.

Writing a quality credit policy requires an intimate understanding of your business, and when preparing a credit policy for a material supplier or equipment lessor, a quality credit policy also requires an intimate understanding of applicable mechanic’s lien laws. Inc. Magazine ran a pretty good article about How To Create A Smart Credit Policy, which gives some good tips on creating a general credit policy for your business. When it comes to collecting on an outstanding debt, the article describes:

In the case of delinquency, be prompt and persistent. “If follow-up contacts are not timely, it sends the message that customers need not have a sense of urgency,” says Swafford. Your written policy should specify contact at regular intervals, starting with a reminder five to seven days after the due date. Further notice should escalate: A second written reminder might be followed by a phone call, followed by a final notice from a lawyer. If you still haven’t been paid 30 days after the due date, it’s probably time to turn the matter over to a lawyer or a collection agency.

The difficulty with all the commentary and resources available about credit policies is that they all look at these policies from the perspective of a company who does not have mechanic’s lien rights. However, when you do have the right to file a lien, protecting and enforcing those rights should be a critical part of your company’s credit and collections policy (read about why you should love mechanic liens). The next section explains how.

Lien Protection As Part Of Your Credit Policy

To incorporate lien protection as part of your credit policy, you need to focus on two essentials: (1) Creating a policy as to which projects will get lien protection, and which will not; and (2) Sending out your required preliminary notices.

Create A Policy Designating Which Projects Should Get Lien Protection

First, depending on your budget and your receivable problems, you may want to protect your lien rights on every single new project…or, you might want to give your best clients a pass and only take protection actions on riskier projects.

I have clients that go both routes, and in large part, it works. For those who pick and choose between projects for lien protection, these clients give each project a category or risk (in colors, for example, green, yellow and red). The low risk clients are not part of the lien protection procedures, but the high risk clients are.

There is nothing wrong with an approach like this, except don’t fall victim to your tendency to trust your clients. Even though a client may have good intentions, the realities of cash flow problems, the current economy and business can control the day and leave you without payment.

Monitor Notice Requirements…and File Your Notices

Knowing your lien deadline is important, but sometimes, it’s not quite as important as knowing your preliminary notice deadline. The reason is simple. By the time lien deadlines expire, you likely already know you have a payment problem. Preliminary notice deadlines, however, expire way before you see any red flags.

If a state requires preliminary notice, they almost always require them from material suppliers and equipment rental companies. There is hardly ever an exception to this. Check out our color-coded map of the USA indicating which states require notices.

Preliminary notice requirements create a big challenge for material suppliers and equipment rental companies who want to incorporate mechanics lien protection into their credit policies. The reason? Because the laws are complex, and they vary significantly from state to state.

You can’t use a single notice form for every state and situation, and you can’t always send the preliminary notice within the same period. For example, preliminary notices in Oregon and Louisiana are required within just 8 and 10 days respectively, whereas Washington state provides a much roomier 60 days to file preliminary notice.

Aside from getting preliminary notices sent on time, you must also get the contents of your notice correct, and it must be sent in accordance with strict requirements. Again, all this varies from state to state.

You need some type of system to help you manage the preliminary notice requirements in each state (Zlien provides this with its web based LienPilot). And if you really want to ensure your preliminary notices are always sent correctly, and on time, consider outsourcing the work to save you time, money and headaches.

Posted in: Collection Laws & Tips, Lien Management / Tags: Collection Policy, Credit Policy, Equipment Lessors, Material Supplier, Rental Equipment Claims / 1 Comment

Five Things Every Construction Company Should Know About Lien Law

On April 18, 2011

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These days all of the laws and restrictions surrounding the construction business can make it difficult for construction companies to file a lien against consumers when necessary. If the states had embraced the Uniform Construction Lien Act that the National Conference of Commissioners on Uniform State Laws drafted in 1987, construction management companies would have an easy time using the legal protection. Unfortunately, lawmakers of the 50 states failed to adopt the proposal.

This leaves the construction industry with varying state laws, which differ so significantly from one area to another that they not only confuse professionals but also homeowners. Thus, while construction laws are confusing, it is important that every company involved in the construction trade must at least know the basics when it comes to about lien law.

1. Keep written proof of the work authorization.

There used to be a time when a handshake sealed a deal and signaled a successfully negotiated contract. However under lien law, this way of doing business is insufficient. A construction company cannot file a lien against a home- or business owner, unless there is proof that an authorized party agreed to have the work done. While plenty of jurisdictions (Colorado is among them) make a concession for an oral authorization, common sense demands a streamlined approach that allows the construction company to produce a duly signed and dated document in case of a dispute.

2. Never file on behalf of a subcontractor or supplier.

It is tempting to try and smooth over the waters for a great subcontractor or supplier who has gone above and beyond what is necessary to make the construction company look good. Yet if the customer fails to pay up, do not file a lien on behalf of this professional. Lien law makes it possible for each professional who works with, or for, a construction company to file a separate lien and protect individual company interests. If the primary contractor gets involved, the company may quite possibly become embroiled in an extensive and expensive legal battle that could render the profits of the job negligible.

3. Cross all T’s and dot all I’s.

A lien statement is a legal document and gets filed with the county clerk. Failure to fill it out in its entirety results in delays and, in some cases, even in a dismissal with prejudice. The latter precludes any future lien filings against the consumer by the filer. Construction companies must err on the side of overdoing the filing by including the full name and address of the consumer, the full name of the business and its principals, the legal description of the home and also the full dollar amount, with an attached accounting, of all monies owed. In some cases, it is a good idea to also attach written communication to and from the consumer, such as e-mails or printed text messages that show the attempts to collect on the debt. Be mindful that states vary with respect to lien notifications; several jurisdictions have ruled that prior to placing a lien on a property, the construction company must issue a pre-lien warning to the owner.

4. Document the progress on the job site with photos and consumer signatures.

A homeowner essentially has three affirmative defenses when attempting to fight a construction company’s lien. First, the party may assert that the company was never duly authorized to do the work on the home or business in question. However, if the construction company got the authorization in writing, this defense will not succeed. Secondly, the homeowner may assert that all monies owed were paid; proper accounting practices, issuing of receipts and showing a complete accounting of customer account debits and credits all work in favor of the business. Finally, the consumer may also claim that the work was not done as contractually agreed. Taking photos of the work as it is being completed and having the consumer sign off on the progress, is a good way to contradict a homeowner who alleges that the construction company failed to deliver as promised.

5. Be careful with codicils to the contract.

Consumers have gotten quite savvy about lien law. To be honest, there are plenty of shady businesses that have made it a necessity for homeowners to learn how to protect themselves when commissioning work to be done on their home. This leaves the reputable contractor in a bind, especially if the consumer insists on adding verbiage to the contract that effectively takes away the company’s right to file a lien. For example, a consumer may add terms that state an arbitrator must settle any fiscal disagreements and that the contractor expressly waives any right to file a lien against the property. If the customer succeeds in placing this term on the contract, and if everyone who does work on the project signs off on it, then the company will lose its legal protection.

Clearly, lien law can oftentimes make life difficult for construction companies. The latter point in this list illustrates that there are occasionally situations when a construction business should consider walking away from a job. A business that is committed to employing all legal means to receive payment must stick to its guns, even if this means that another company gets the contract. If there are compelling reasons to loosen the rules for one particular consumer, it is best to discuss the potential ramifications this decision may have with a construction law attorney.

Posted in: Collection Laws & Tips, Mechanic Liens, The Legal Corner / Tags: Uniform Construction Lien Act / Leave a comment

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