The mechanics lien and preliminary notice business is not without its complications. Just as it’s complicated for a construction business to manage all the nuances in mechanics lien compliance, the same difficulty presents itself to those lien and notice companies. Trusting your notices and liens to a service provider is not a decision to take lightly, as any small mistake can impact your rights. Here are three things to think about and ask your mechanics lien service before committing:

 1) How Do You Keep Up With Law Changes and Compliance Issues?

If a mechanic’s lien service provider doesn’t have a plan and a consistent policy to monitor law changes and compliance issues, consider this a huge red flag.  State legislatures make at least 5-10 changes to mechanic’s lien and bond claim laws somewhere in the United States, and court decisions are constantly making tiny alterations. Each decision and state legislative bill may impact the lien and notice forms to use, as well as service requirements, timing issues, and more (Check out our Lien Law Alerts category, which publishes lien law changes nationwide).

When you ask a provider about their compliance procedures, they may tell you that they have a “network of attorneys.”  Well, consider this a red flag too.

Having a “network of attorneys” is just a fancy way of telling you they have a list of attorneys in every state.  Big deal.  I can give you hundreds of lists of attorneys who do construction law or construction lien work.  I promise you, having a “network of attorneys” is not going to notify that mechanic’s lien provider each time a lien law changes, or help them ensure that their forms and procedures are compliant.

There’s another problem with the “network of attorneys” claim. These type of mechanic lien providing companies usually act as a simple referral house for attorneys. Each time you order a preliminary notice or a mechanic’s lien, you’re going to be shuffled off to an “in-network attorney” to fulfill your order.  There are three negative implications to this type of business method:

1. If you’re working in multiple states, you’re not likely to have the same attorney help you in each place, which is going to be confusing and inconsistent.  You want a single vendor you can work with to get these things processed.
2. When you get shuffled off to an attorney, you’re going to get contacted by that attorney, you’re going to get charged attorney prices, and these attorney’s are going to followup with you to try and convert the lead into more legal work.
3. Finally, the company itself doesn’t do anything for you, they are just a clearing house or referral manager for this attorney network.

An example of a vendor who has a “network of attorneys” type business model is NLB Access.  While they may not function exactly as I’ve outlined in the above section, they are certainly a type of service that will process your preliminary notice and mechanics lien orders by utilizing a network of attorneys across the country.

NLB Access tries to spin this as a positive.  On the “Solutions” page of their website, they say:

Some notice filing companies may be cheaper, but NLB provides you with a case load manager that is an experienced legal professional who will review and process your claims..Our General Counsel’s office, in collaboration with local counsel, will inform you of your rights and create an effective strategy to recover your money.

I may be wrong about this, but imagine trying to work with these people if you need 100 notices sent within a month in 5 states.  Will you be shuffling from local counsel to local counsel?  And who knows how much they would charge for this (they don’t have flat rates posted on their website)?

2) What Is Your System For Fulfilling Orders?

Managing preliminary notices, mechanic liens and bond claims on a number of projects is challenging. When an order comes into a mechanic lien service for a new lien or notice, what does the company use to fulfill that order? How do they know what form to use? How do they actually get the form filled, and what courier network do they have in place to get your document delivered or recorded?

All very important questions. When learning about a lien service provider’s system, listen in to see what they do to reduce the risk of errors. When handling hundreds of envelopes and pages of paper every day or week, being organized and having a system that reduces the risk of error is a key feature.

Unfortunately, if you peel back the onion, you may find out something scary:  A lot of these lien services don’t have any system at all.  Sometimes, they just have a staff with access to a server where there is a folder and bunch of document template forms. If you’re working with a lien service operating like this, you should hear “document templates” and equate it with “disorganized mess.”

Zlien has spent five years and hundreds of thousands of dollars in developing a state-of-the-art order fulfillment system. This works on two ends. On the front end, when you’re placing an order, the system guides the user through the various forms available to choose the right form for the job. On the back end, when a order is placed, our staff members automatically have everything they need to fulfill the order.Forms are automatically generated and filled-in with your client data, and there are a host of features that monitor our staff members work to mitigate the risk of error.

Another thing to keep in mind is order tracking.  You will want to know the progress of your order as it is being processed.  Is this something your lien service will perform automatically, or are you getting manual emails from your provider giving you an update when they get around to it?

If you’re getting manual emails, beware.  This means the lien service provider is probably managing all of their orders manually, and it is surprisingly easy for them to get busy and forget all about your project.

Zlien is proud of its automatic system progress emails, which was actually just updated and posted about here.

3) Are You A Licensed Legal Document Preparer and Insured?

Once you are comfortable about a lien service providers systems and compliance procedures, you next want to turn to something that is perhaps most important: Their credentials and security.

Here are some issues to keep in mind:

Are They Licensed?

The Legal Document Preparation and/or Software industry may not need a law license, but in some jurisdictions, there are laws that regulate these service providers.  The state of California, for example, does specifically recognize “Legal Document Assistants,” and requires that they have a license to prepare legal forms for that state. There are also some regulations on how these companies may advertise themselves.

Zlien is a licensed Legal Document Assistant in the State of California (LDA-352).  If your lien service company purports to prepare legal forms in the State of California without an LDA license, it is breaking the law.  And it’s easy to figure out if the lien service is actually licensed.  California statutes require LDAs to put their license number on their website in their footer.

I can give you an example of two companies who are purporting to prepare mechanic liens and preliminary notices in California without a license. LienItNow.com does not have their LDA license information in their website’s footer, and Tradition Notice Services (from Tradition Software) does not have their LDA license information in their website’s footer.  A construction company ought be careful in using these services.

Are They Insured?

Mistakes happen.  Period.  There’s no such thing as a perfect anything.  If you’re trusting your mechanic lien or bond claim rights to a lien service provider, you would be well served to see whether that company carriers errors and omissions insurance.  If they carry errors and omissions insurance, it means that company is serious about their business (they invest in E&O Coverage) and serious about serving their clients (they won’t leave you hanging).

Not only does Zlien carry errors & omissions insurance, but we also publish our insurance policy’s declarations page on our website.  Ask your lien service provider for their insurance information.

Here is the summary:  Preserve your lien rights.  Avoid receivable problems. Stop Losing Money.

It’s a good idea to stop every now and again and see how you’re doing with your goals and business expectations. I may actually go overboard on this. I have breakfast by myself every Monday morning to go over my goals from the previous week and the week to come. At the beginning of each month I go over financials and budgets. It takes time, and it’s hard to do sometimes in the face of all the regular business fires, but making time for these things really does help.

As 2012′s first month draws to a close, it’s a good business exercise to take an hour or two away from the grind, and go over your successes and failures in the accounts receivables department.

You probably still remember that feeling you experienced at the end of December, when you thought about how burdensome bad debt was for your business. If things haven’t changed in January of this year, they’re not likely to change in the months to come, and that means you need to make a change.

In the construction industry, there is a simple and effective fix, and that’s Mechanic’s Lien Compliance.

The key word in that phrase is compliance. Just like your business must comply with Davis-Bacon prevailing wages, immigration laws and licensing regulations, you should start thinking of mechanic’s lien compliance in the same way.  You can do it, but its a discipline.

After all, the same assistant or staff member may be in charge of compliance with contractor licensing rules, Davis-Bacon and prevailing wage regulations, and immigration compliance. Perhaps the staff member needed a bit of training, or attended some seminar on the topic, but they were able to pick it up and keep the company in compliance.

Despite the success or failure with having staff in charge of compliance with other regulations, this post discusses why it’s a grave mistake to rely on in-house staff to handle mechanic’s lien compliance.

Patchwork of Requirements and Forms Are Hard to Master

I’m familiar with a lot of regulatory compliance matters that construction businesses face every day, and those discussed in the introduction to this post (Davis-Bacon, immigration, licensing, etc.).  You must understand, the complexity of these regulations pale in comparison to the complexity of mechanic’s lien laws.

There are two challenges your staff members will face in trying to master mechanic’s lien issues.

First, it’s the laws themselves.  It’s an absolute patchwork, not only from state-to-state, but from project-to-project and scenario-to-scenario within a single state. Depending on where you’re working and what you’re doing, your preliminary notice and mechanic’s lien requirements and deadlines will differ. If you want to assign complaince to a staff member, there’s a lot of research required to keep up with these legal intracacies.

Second, it’s the forms.  Once you figure out what to file and when, then you have to put the form together, and there’s a thousand things that can go wrong with preparing, sending and tracking these forms.  Take a look at a post I wrote previously about the perils of using Do-It-Yourself Mechanic’s Lien forms.

Paperwork Burden is High For Part-Time Dedication to Lien and Notice Compliance

Sending out a notice or filing a lien can be logistically demanding.

On the preliminary notice front, most notices must be sent to multiple parties, and must be sent in a particular way.  After a preliminary notice is sent, you must draft and save a document to prove the notice was mailed, and you must track the mailing to ensure delivery. The result of these requirements is that each notice must be copied multiple times, collated, and then delivered to different parties, and each mailing must be tracked to verify delivery.

On the mechanic’s lien front, things can get stickier. The mechanic’s lien – like the preliminary notice – must usually be mailed to multiple parties and tracked. This, however, is besides the real task, which is getting the lien recorded in the correct recording office in the correct county, which involves verifying margin and font-size requirements, getting a filing fee quote, arranging for courier to deliver the lien, and more.

The point here being that there is a heavy paperwork burden in sending notices or filing mechanic liens, and the use of a staff member to handle these monotonous tasks can be a weight on their other duties.

Property Records and Ownership Records Needed, and Not Available

When you prepare a preliminary notice or a mechanics lien, you often (always) need information you may not have.  For example, how do you send a preliminary notice to an owner if you don’t know who the exact owner is?  Or, how do you identify a property with a legal property description if you don’t know the legal property description?

Your staff members will not have access to updated property records to check the information available to your company, or to find information you don’t have.  Plus, researching into this information is another drain on your staff member’s time.

It Costs You More In The Long Run

The last reason why you don’t want to offload mechanic’s lien complaince on your secretary or staff member is…why would you?  It just doesn’t make any fiscal sense to do so.

You can outsource this work for much less than you think, and really, when you factor in postage rates, the time spent doing the work, and the time not spent on other more profitable work, you can outsource this work for less than it will cost you to do it yourself.

Top 4 Mechanic Lien Law Challenges For Material Suppliers
More than any other construction participant, complying with mechanic lien and bond claim laws is most burdensome for building material suppliers. This post examines the lien and notice challenges specific to those in the building material supply business.

Should Material Suppliers Wait Until An Account Is Overdue Before Sending Preliminary Notice?
Since material suppliers furnish to so many projects, they often inquire if there’s an easy strategy to sending preliminary notices:  just send it when the account is overdue.  The approach has problems, because by the time an account is overdue, preliminary notice is frequently too late. This post examines when this may work, and when it won’t.

Special Mechanic Lien Rules for Specially Fabricated Materials
When materials are fabricated specifically for a job, the manufacturer or supplier may be interested in filing a mechanics lien even if the materials are never actually incorporated into the project (i.e. the order is cancelled).  While liens are generally not allowed for materials not used in a project, this post examines why specially fabricated materials are frequently an exception to this rule.

Suppliers to Suppliers Usually Can’t File A Mechanics Lien
In a world where there are few universal rules, the rule that suppliers to suppliers cannot file a mechanics lien is pretty universal. When supplying to a prime contractor, a subcontractor, or just about anyone who furnishes some type of service other than the strict delivery of materials, the supplying party has mechanic lien rights.  If furnishing materials to someone else who just furnishes materials, however, laws consider the supplier’s supplier as too far removed to qualify. This post examines why, and how prevalent the rule actually is.

The Material Suppliers Guide To Creating A Mechanic’s Lien Policy
The mechanics lien is really just a credit and collections tool, and just like companies need a credit / collections policy, they also need what we’ve termed a “mechanics lien policy.”  This post defines the concept of a mechanics lien policy, and discusses the things to contemplate when constructing such a policy so that the material supply company consistently protects and perfects its mechanic lien rights.

How Material Suppliers Prove Its Materials Were Incorporated Into The Property When Filing A Lien
Material suppliers only qualify to file a mechanics lien if their materials were incorporated into the project (except for specially fabricated materials, see above). That begs the question: how does one prove its materials were actually incorporated into the jobsite.  This post examines how courts address this issue, and what a material supplier needs to do to ensure it can meet its burden.

How Zlien Can Help Material Suppliers
The Supplier Series posts conclude with an article about how a mechanics lien and preliminary notice service like Zlien can help material supply companies and materialmen with the challenges and issues discussed in the preceding posts.  This post actually refers back to the first post (about material supplier challenges), and discusses how Zlien can help with each one.

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

Oh, if only it were that easy.

Unfortunately, when I encounter a business with a preliminary notice procedure like this or am asked about such a procedure, I warn them that this is flying pretty close to the sun.  There are two primary reasons why this doesn’t work:

There’s Not Enough Time

The primary problem here is that there’s simply not enough time.

Let’s take a look why.  Most supplier accounts are on a NET 10 or NET 30 basis.  If you were to pull the trigger and send a notice immediately after an account becomes overdue, therefore, you’re sending the notice at least 11 or 31 days after furnishing it to the project. In many states, your notice would be too late.

Oregon, for example, requires preliminary notice be sent within 8 days of first furnishing materials.  Those supplying equipment in Louisiana must send their notice within 10 days of the same date. Most states (California and Florida included) require notices to owner wtihin 20 days of first furnishing.

Waiting until an account is overdue is problematic because the time frame just doesn’t work.  Plus, implementing a procedure like this is a slippery slope, because while I assume for this discussion that the notice will go out the day after an account is overdue, we all know that won’t happen in practice.  There are business fires, delays, holidays, weekends, and just plain procrastination.  The gap between when your notice was required, and when it’s due, will widen.

Segmented Compliance Is Prone To Errors

The other problem with this idea of sending notices only after an account is overdue isn’t as obvious, but it’s as prevalent.  That problem is that segmented compliance like this is prone to errors.

Instead of implementing a mechanics lien and preliminary notice procedure that gets the correct notice sent out every time, sending notices and filing liens on an “as-needed” basis means that you and your staff are going to scramble every time there’s a non-payment situation to learn the applicable rules and rush out a form.

It’s almost a guarantee that this approach will result in error, not only because it’s being rushed and that results in error, but also because state laws are complex and contain nuances that get overlooked unless comprehensively understood.

It’s interesting that material suppliers are so consistently met with strict lien and bond claim laws in each state. When talking about mechanics lien and bond claim laws, consistently is a word usually not uttered. States do, however, pretty consistently regulate the materialman’s lien rights. One explanation for this is that unlike other construction participants, material suppliers can run up a large bill for materials from miles away, without ever stepping foot on the project.

Whatever the reason, material suppliers are met with unique challenges when trying to comply with mechanics lien and public bond claim requirements.  Here are what I consider to be the top 4:

Material Suppliers Almost Always Have Notice Requirements, Even When Others Don’t

I hate calling a state a “notice state” or a “non-notice state,” even though I’m frequently asked by clients to make this classification. There are some states who fit neatly within these categories. California and Florida, for example, are true notice states requiring a preliminary notice to owner at the start of work for just about everyone. New York is an example of a true non-notice state, never requiring preliminary notice.

The first challenge for those who supply building materials is knowing whether a state’s law contains any nuances applicable only to them that require preliminary notices.

But there are a lot of states like Louisiana, who are generally a non-notice state, but who still require certain parties send statutory notices.  Which parties are these?  You guessed it, material suppliers. (Read about Louisiana’s special notice requirements for material suppliers).

Even states that don’t generally require preliminary notices frequently sneak in notice requirements for material suppliers. Material suppliers need to understand this.  While word on the street might be that a particular state does or doesn’t require a preliminary notice to owner, that might be the general rule and an exception rule might require such notices for materialmen.

The first challenge for those who supply building materials, therefore, is knowing whether a state’s law contains any nuances applicable only to them that require preliminary notices.

Material Suppliers Usually Have A High Volume of Projects

There are exceptions to this statement, but it’s generally true that general contractors, architects, engineers and subcontractors all handle a lower volume of projects than material suppliers.

In the material supply business, companies typically supply to multiple projects in a single day. Supplies and materials go out of their yard or stockhouse all day long, and get dropped off at projects across the city, state or even nation. This business model stands in contrast to the typical tradesman or professional, who work in a designated area and, since their physical presence is required on the jobsite, can only handle a limited number of projects at a time.

Complying with mechanics lien and notice requirements is a lot more intensive for materialmen.

The practical result of this may be obvious: complying with mechanics lien and notice requirements is a lot more intensive for materialmen. There’s more paperwork, more logistics, and more room for error.

Sending preliminary notice out on every project is easier if you sign 1-5 new contracts per week.  However, when you’re getting multiple purchase orders each day, keeping up with the notices and lien deadlines becomes remarkably more difficult.

The second challenge for those supplying building materials, therefore, is managing the logistics, deadlines and requirements for a higher volume of projects.

Material Suppliers Operate In Multiple States

This isn’t always true; there are many materialmen who only supply to a designated and limited area. Unlike contractors and other construction professionals, however, material suppliers can easily expand into neighboring states because licensing regulations never apply to them, and thus, serving multiple states is an achievable business model.

While the licensing law complexities don’t apply to supply businesses, the lien law complexities do, and it becomes fifty times more difficult to comply with mechanics lien and preliminary notice requirements when you’re sending materials across state lines.

Becoming a master of one state’s rules is achievable.  It’s still difficult because the requirements are different depending on your tier in the project, the project’s type, the dollar value of your materials, and more…but, one state is achievable.  Take all those variables and accommodate for them in two, three, four, or more states, and you’re staring at a logistical nightmare.

More than any other construction industry participant, those in the material supply business deal with this issue most frequently. Accordingly, the third challenge for materialmen is managing the lien laws and deadlines as they change state-to-state.

Material Suppliers Don’t Know When A Project Ends, Or Much Else About The Project

It seems that being an off-site construction participant creates two problems in the mechanics lien context:  First, state laws are more strict to protect the property owner and general contractor from unknown claims.  Second, which is the subject of this challenge, the material supplier doesn’t know much about the project.

More than subcontractors and others who work on-site, material suppliers are left in the dark about the status of construction, construction delays, financing or financial problems, and the like. They send their materials, and then sometimes never hear about the project again. Sometimes that’s just because it’s the nature of the supply business, but other times, it relates to some of other challenges I’ve outlined, such as the high volume of projects materialmen are involved with, which makes keeping up with project details more difficult.

The challenges raised by this lack of information are really two-fold.  First, material suppliers are the last to know about money problems.  Second, material suppliers don’t know when a construction project ends.

The problem with the first issue is easy to figure out; without knowledge about the money problems, suppliers may be the last to file their liens (a lien priority issue), or may not get their liens filed in time. The second problem isn’t as obvious, but in many states, it’s even more important.

In places like California and Louisiana, the time to file a mechanics lien doesn’t start from when you last furnish material to a project, but rather, counts from the absolute end of construction on the project as a whole.  How do you know when that is?  There’s really no way, but because of the off-site nature of the supply business, material suppliers are working with less information than anyone else.

The fourth challenge for the supply business, therefore, is that they’re out of the information and rumor loop about a project, and as a result, are more vulnerable to missing lien opportunities.

Every company has receivable problems, and everyone has an approach to these problems that seems ineffective.

Every company has receivable problems.  It doesn’t matter if your a tradesman, a material supplier, a design professional or equipment lessor, every now and again you provide your services and go unpaid.

You may or may not have debt collection procedures in place.  Perhaps you have an in-house staff member hound debtors with phone calls and certified letters.  Perhaps you have a debt threshold, when the problem is passed onto a collections agency, or a law firm. Whatever your procedures may be, these two facts are undoubtedly true:  (1) Collecting this money in or out of house costs you additional money; and (2) At the end of the year these unpaid bills add up and can be a substantial amount of bad debt.

I’ve talked about bad debt in the past here on the Construction Lien Blog.  In “Use Zlien and The Lien Laws to Reduce Your Bad Debt in 2012,” there is an entire section of that post dedicated to the “high costs of bad debt.”  Here is a quote:

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.

The construction industry has access to mechanic lien or bond claim laws on nearly every project. These lien laws are super powerful, as they turn the project job site itself into collateral.  Just like a bank doesn’t loan money without getting collateral, if you pay attention to and preserve your lien rights, you too can have collateral every time you send out materials or perform other services on a construction project.

So, if lien protection is so great, why doesn’t every company do it on every project?

The answer, unfortunately, is because lien laws are extraordinarily complex and burdensome.

Laws are different state-to-state, and even within the same state your requirements will differ depending on the type of work you do, the character of the project, your tier on the project, the project’s value, and more. For companies who work on multiple projects each year, and especially those who work in multiple states, managing these requirements is impossible. Further, once the requirements are known, sending, filing and tracking all of the required notices and lien documents is a paperwork nightmare.

In consulting with companies across the country on lien compliance issues, I’ve learned that as a consequence of all these complexities, most comply simply disregard their lien rights. They usually take this “it’s more trouble than its worth” attitude after assigning the task of complying with the lien laws to a staff member, secretary, assistant, or even in-house legal counsel.

One cannot understate, however, just how complex the mechanic lien landscape is nationwide. It’s virtually impossible to comply, or train someone in-house to lead compliance.

One cannot understate, however, just how complex the mechanic lien landscape is nationwide. With or without lien and notice writing software, it’s virtually impossible to comply, or train someone in-house to lead compliance.  I’ve talked about this very phenomenon before in the post: 4 Reasons Why It’s Smart To Outsource Your Preliminary Notice Work.

While everyone has receivable problems, and lien laws are the best protection money can buy, because compliance with these laws is so complex companies typically forfeit their lien and bond claim rights. At the end of each year, these companies find themselves with a pile of bad debt and a history of collection costs and attorney fees, wondering if there is a better way.

You Need A Turnkey Mechanics Lien Solution

The answer to your bad debt headaches is to protect your mechanics lien and bond claim rights (see our posts about Why It’s Important To Lien and How A Mechanic Lien Gets You Paid). Since lien compliance is so complex, however, you need a turnkey mechanics lien solution.  Something that can completely take the lien process out of your company’s hands, and do everything: Monitor what must be filed and when, file and deliver required documents, track all filings, make collection efforts, and file lien enforcement actions.

In fact, you should make it a new year’s resolution to find such a turnkey service, because if you spend the entire year sending all required notices and protecting your mechanic lien rights, you’ll close out the 2012 calendar year with substantially less bad debt than 2011 and previous years.

And not to brag, but Zlien is the only company out there that offers such a complete turnkey solution to folks in the construction industry.  And we’re the only ones who can handle your mechanics lien compliance from soup to nuts – at an affordable rate – because we use proprietary front end and back end software to manage all of the lien law’s complexities.

If you’re ready to protect your lien rights on every project and stop losing money, contact us to learn how you can Lien Smart.

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.

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.