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!

Long Answer: The first thing to say about this subject is that if you’re doing work that requires a license without having that license, you’re treading in dangerous water regardless of your state’s laws.  While some state are more liberal and allow unlicensed parties to collect amounts owed to them, it is very rare when the unlicensed contractor isn’t penalized in some way. Therefore, if you’re unlicensed and doing construction work that requires a license….get licensed!  You can read more about Contractor Licensing laws on my other blog, Construction Law Monitor.

The question here is whether you can file a mechanics lien if you’re unlicensed.  Unfortunately for unlicensed contractors, this question may be just the tip of the iceberg.  In reality, unlicensed construction participants must ask a more significant question: can they recover for their work at all?

I’ll discuss the laws in California and Washington, and then in Louisiana, to compare how the answer to this question may vary by state.

In California and Washington, the laws against unlicensed contractors are very strict — unlicensed contractors have no recovery whatsoever.  This means they cannot file a lien, or a lawsuit, or anything at all.  If they did $1,000,000 of work, and a party refuses to pay them, they are completely without a remedy and basically donated their time and money to the construction project.  (See previously written post: Can Unlicensed Contractors Lien in California?)

Is this fair?

There are two schools of thought on this.  In Washington and California, the legislature considers it more important to regulate the unlicensed constructor market than it is to ensure unlicensed contractors get paid.   States like Louisiana take a different approach.  In Louisiana, the unlicensed contractor is still penalized (i.e. he can get penalized by the licensing board, and his contract is declared null and void and the unlicensed contractor can only recover the “minimum value” of his work), but he is still allowed to recover some sort of compensation for the work he performed…and that means, he can file a mechanic’s lien.

If you’re doing work in California or Washington and are unlicensed, you’re really out of luck.  If you’re in Louisiana, you have some legal ground.  Elsewhere, it’s really important to examine that state’s liens laws to determine if you can file or recovery for your work.

The Construction Lien Blog (and our sister Construction Law Monitor blog) has been chosen to take part in the Trades Hub.

Trades Hub is an extension the the mikeroweWorks website, which is “dedicated to championing the cause of hard workers and reinvigorating the skilled trades.” The tag line: Mike Rowe Is No Expert, But He Knows Where To Find Them.

Here is the press release from the mrW website:

Mike Rowe Is No Expert, But He Knows Where to Find Them

After being an apprentice on nearly 300 dirty jobs, Mike Rowe is still no expert, but he sure knows where to find them. In 2008, Mike launched mikeroweWORKS, a website dedicated to championing the cause of hard workers and reinvigorating the skilled trades. Since then, mrW has provided resources, news, and a community forum for folks from all kinds of trades. Now, with the launch of the Trades Hub, the goals of mrW can be expanded even further and across many more website portals.

Think of Trade Hubs as a “first cousin” to mrW. With this new platform, we’ll be able to pull together even more experts from such diverse trade fields as construction, plumbing, landscaping, manufacturing, machinery and HVAC just to name a few.

Here’s what you can look for at the Trades Hub:

More High Quality Content: The mrW Trades Hub will be pulling together all kinds of blogs, articles and news stories relating to the trades, by the trades and for the trades. They will be updated throughout the day.

One Stop Shop: With an easy to navigate site, users will be able to quickly source out those areas of interest that appeal to them on any given day. The links will take them right to where they want to go without sorting through all kinds of search engine pages for the right site.

Finding the Diamond in the Rough: When you consider the millions of new pages and posts uploaded across the internet everyday it’s hard to find the best representations for your interests. Trade Hubs takes internet searching to the next level by identifying those popular blog and websites that might normally go unnoticed if you’re not a regular subscriber.

Building Up the Trades Community: “The skills gap is a real concern that’s getting more worrisome every day. Fewer skilled tradesmen in the workforce will affect us all. Younger folks need to have a better understanding of how they can benefit from learning a trade, and parents need to encourage their kids to consider this worthwhile and important path. mrW strives to reinvigorate the trades. The mrW Trades Hub will help us in that effort.”

mikeroweWORKS would like to thank Tony Karrer with assistance from John Sonnhalter for their efforts in getting the Trades Hub up and running.

Visit the site at http://tradeshub.mikeroweworks.com.  Below is a screen shot of the site.

]]> http://constructionlienblog.com/2011/04/construction-lien-blog-an-expert-on-mike-rowe-works-trades-hub/feed/ 2 http://constructionlienblog.com/2010/10/deliver-the-model-disclosure-statement-in-washington-or-else/ http://constructionlienblog.com/2010/10/deliver-the-model-disclosure-statement-in-washington-or-else/#comments Fri, 29 Oct 2010 05:00:27 +0000 Scott Wolfe Jr http://constructionlienblog.com/?p=1877 The Model Disclosure What?

That’s what a lot of Washington contractors say when they give my law office a call and ask whether they have lien rights.   Sadly, most contractors (especially the smaller outfits) have no idea that they’re required to provide this on each and every project before work begins.

What happens if it’s not provided?    Unfortunately, quite a lot.

First, if the Model Disclosure Statement is not required, you can lose your lien rights.    Second, you can be fined by the Department of Labor and Industries.    And for a third thought, what about possibly being exposed to a civil consumer protection act claim, or something like that?

This may seem harsh, but I’m here to tell you that it’s quite difficult to wiggle away from this requirement.  If you are a contractor of any shape and size (even a handyman), and you’re working on a residential project worth more than $1k or a commercial project worth less than $60k, the Model Disclosure Statement must be provided, it must be signed by the owner, and you must retain a record of the signed statement for two years!

I just got finished posting on this subject at my law firm’s blog, the Construction Law Monitor.   That post, Model Disclosure Statement Required In Washington When Contracting With Owner, offers a good analysis of when the MDS must be provided.

Getting a copy of a Model Disclosure Statement is not tricky.  You can download it for free from the Department of Labor & Industries, or download it right from this site..  Filling it out is a cinch.

If you’re in Washington state, do it or risk your lien rights.

Related articles

Wolfe Law Group’s Construction Law Monitor recently blogged about the dangers of using one contract in multiple states.   The post used the “pay when paid” provision as an example of why multi-state contracts are problematic.

The provision itself seems pretty clear:  one party will get paid when the other party gets paid.    It isn’t.   Interpretation of this provision varies by state, with some states striking down the provision entirely as against “public policy” and other states distinguishing between “pay when paid” provisions and “pay if paid” provisions.   The only way to protect your company against this tricky provision is to consult with an attorney about how these provisions are treated in your jurisdiction.

While interpretation of “pay when paid” provisions differ from state-to-state, there does appear to be one constant about this provision across the country:   It doesn’t extend your lien period.

Most states require liens be filed within a certain period after you last worked on the project, or after the project is complete.   The fact that you or your company is waiting for payment because the prime or an upper-tiered sub hasn’t been paid is completely irrelevant.  The lien period still starts when it starts, and ends when it ends.

As you might imagine, this presents a bit of a Catch-22.

On the one hand, you must file a lien to preserve your right to lien.  On the other hand, filing a lien may complicate the payment problems for the prime or upper tier sub (and thus your payment problem), and may cause animosity when negotiations are otherwise calm.

Unfortunately, there is  no easy fix for this complication.    Each situation should be examined individually, and sometimes, a simple joint check agreement may be the solution.  It’s just important to remember that good faith negotiations and waiting for payment under a contractual obligation to do so will not likely extend the lien period, and too much talk could result in the loss of lien rights.

Here are some great resources and articles on Pay When Paid provisions:

- Fourth Circuit Concludes Pay When Paid Clause is Unambiguous and Enforceable

- Pay When Paid or Pay If Paid Provisions

- Is Your Pay When Paid Clause Worthless?

- Contingent Payment Clauses, Use With Caution

So, how do you make your problem an important problem to the other players working on a construction job?   With a mechanic’s lien, of course.

The Wall Street Journal recently reported on a mega-project in Las Vegas (the $8.5 billion City Center), and a contractor dispute that is affecting the project’s finances.   There was something really interesting about this report for those of us who follow mechanic lien law and news – and that’s this quote from City Center President Bobby Baldwin, referring to over $500 million in liens filed against the project:

Obviously everybody is concerned about the liens.   They have to be explained in great detail to our residential buyers.

To resolve the concern about the liens, the property owner is slowly paying off all of the subcontractor and supplier claims while they proceed with their dispute against the prime contractor.   Without those liens, those subs and suppliers would have to wait months or years for the main dispute to resolve, and payment to trickle down from the owner to them.  Depending on the size of the contract, that’s something that could cripple their business.

The Wall Street Journal article and construction dispute at the City Center was the subject of a blog post on the Construction Law Monitor, which that blog called a “Large-Scale Example of an Everyday Construction Dispute.”   And that summary is perfectly true when it comes down to mechanics liens.

Regardless of how large or how small the project, mechanics liens creates a problem for the project.   If you’re not paid on a construction project, the best way to make your problem the construction project’s problem, is to file a mechanics lien.

If you’re a fan of what we do here, we’d appreciate you visiting this page and casting your vote for us.  You can also vote for our friends the Construction Law Monitor and Construction Law Musings.   They are just above us on the list.

As usual, thanks for reading!

In discussing how organization can help an organization with its legal obligations, the post says:

And insofar as your contractual and legal duties are concerned, if you’re organized and know what they are, you’ll have a much better chance of fulfilling them.

This is exactly what the Lien Pilot can do for your business.

Notice and lien requirements are hyper-technical and confusing.  If your company is handling multiple construction projects, or working in multiple states, it’s nearly impossible to keep track of notice and lien requirements.    Some clients reported that they used to keep track of lien and notice deadlines by inputted all due dates in Outlook – which, of course, required them to manually calculate the dates.

Zlien provides contractors with an easier way.  You simply input your project’s details, and Zlien calculates all of the project’s notice and lien requirements and deadlines.

In 2010, make a resolution to increase your bottom line and utilize the nation’s lien laws to protect your right to payment on construction projects.   Resolute your company to Lien Smarter in the new year, and sign up for a free account with Zlien.

According to Simonson, the commercial construction industry forecast remains grim “at least through 2010.”

For contractors, suppliers, and other construction professionals throughout the nation, this means that good record-keeping and collection practices remain important.

Almost one year ago, Wolfe Law Group posted an article on its Construction Law Monitor after Ken Simonson reported that 2009 would present economic challenges to contractors.

Now more than ever, the article stated, contractors should consider the benefits of a construction or mechanics lien.  The article went on to state:

As soon as the construction project comes to a halt or payment is late, contractors, subcontractors and suppliers should rush to file its construction / mechanics lien to protect its interest in the property. Construction liens are available in virtually every state, and works to transform the project job site as a sort of “collateral” to the contractor for its payment.

The time available to file a construction lien is not indefinite, and the legal requirements should be followed to the letter. However, when filed correctly, a construction lien can help your company recover payment for its project.

Although the stimulus spending will be cause for some optimism in the construction industry, it appears economic struggles will stick around into 2010.    And the recommendations of Wolfe Law Group in 2009 are repeated today.

If your company is awaiting payment, file your lien with Zlien today.   Lien Smarter…Get Paid.

According to the blog, this requirement already exists for subcontractors, and the purpose of the amendment would be to extend the requirement to contractors who contract directly with the property owner.

The Illinois Construction Law Blog does weigh the pros and cons of the bill.

In their discussion, they mention that the bill makes sense because homeowners cannot be considered as sophisticated as commercial property developers.

On the other hand, however, since the bill would only require notice before filing the lien, the blog states that notice could be given the day before the lien is filed. Of this time frame, the author asks “what protection does that afford the home-owner?”

A similar requirement exists in Louisiana, according to Wolfe Law Group’s Construction Law Monitor. They describe the requirement as follows:

Notice is required whenever you are working on a residential project, and you contract directly with the owner of the property, who also lives in the residence.

The type of notice required is called the “Notice of Lien Rights.”

The Notice of Lien Rights to be sent to owners in residential projects is very important, because the law requires that it be provided before work begins, and not as a condition to your construction contract.

Read full article here.

The difference between the Louisiana requirement and the requirement in Illinois, however, is that in Louisiana notice is required before work begins, and in Illinois, its required only before filing the lien. Perhaps the goals of the Illinois legislature would be better achieved by a rule similar to that of Louisiana’s?

Nevertheless, for the time being, the requirement does not exist at all for contractors in Illinois, and is only a twinkle in the legislature’s eye. You can track the progress of the bill at this link.