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

Adding Contacts Made Easier In The LienPilot

On September 20, 2011

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We made a small improvement to the LienPilot last week in how project contacts are added to your database. Previously, after pressing the “Add Contact” link, the user was directed to a second page where the contact information was requested. When the contact information was entered, the user was brought back to the project’s contact screen.

The multiple screen flow here was unnecessary, and you can now add a project contact without ever leaving the contact page. When you press the “Add Contact” button, the contact fields appear.

While this is a subtle change, it really makes a difference in the usability of this page, and if you’re inputting a lot of contacts it can save a lot of time. Here’s a screenshot of how this feature looks now:

Posted in: Web Updates / Tags: LienPilot / Leave a comment

Managing and Ordering Documents When Your Company Has Multiple Locations or Brand Names

On September 12, 2011

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Since our service is especially talented in helping companies manage and file preliminary notices and mechanic liens in multiple states across the country, a lot of our clients have more than one physical location. Sometimes, companies will often have multiple brand names as well, or a number of parent, sister and subsidiary companies.

We’re asked: Can Zlien’s software (the LienPilot) and ordering system handle multiple locations or company names?

The answer is yes. This is accomplished by using the LienPilot’s “Locations” feature, which allows you to associate multiple locations to your LienPilot account. These locations may or may not have an alternative company name. The use of our “Locations” feature is great for companies who have multiple office addresses and the same company name, and/or companies who have multiple subsidiaries with different company names.

How do you set up alternative locations?

Start by logging into to your LienPilot account with us at http://login.zlien.com. Once logged in, click on the “Settings” link at the top of the page. This will bring you to an area where you can administer your company’s account settings.

You’ll see a yellow box in the top right corner of this page: “Locations Management.” You will want to click on the button “Add Location.”

What you’re basically doing here is adding a “location” to your account for this new company. It can be the same address and contact information (that’s fine, just fill it in with whatever information is relevant), but where you’ll want to put in the alternative company’s name is in the fields:

Name of Location
Alternative Name

The “Name of Location” is the name you are giving to this location for internal purposes only, so you can identify it in a list within our LienPilot. The “Alternative Name” is the name of your other company, as this is the alternative name of the company that will be used on the notice / lien itself.

When you add a project within the LienPilot, or go through to order a notice or product through the Wizard, you’ll be asked to select the appropriate location. Make sure you select the alternative location, and the order will be processed under that company’s name.

Here is a screenshot of the “Add Location” screen:

Location Management in Zlien's Lien Pilot

Posted in: Our Services & Us / Tags: LienPilot, Locations / Leave a comment

Chasing Storms For Construction Work? Be Sure To Protect Your Lien Rights

On September 3, 2011

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Chasing Storms For Construction Work? Be Sure To Protect Your Lien Rights

Hurricane Irene in the Northeast, Tropical Storm Lee in the Gulf South…the meteorologist are working around the clock, insurance adjusters are on the move, and its quite clear that we’re at the peak of the 2011 hurricane season. While it’s never good to hear about folks losing their homes and damages to our infrastructure, there is a silver lining for the construction industry. With construction spending down again this past month, the new work is much needed.

It’s common for suppliers and construction professionals to “chase” these storms, and set up shop in new territories to make grabs at the available business. In fact, there are some organizations that focus on disaster recovery and repair. However, while there are state, federal and insurance dollars available to pay for this work, do not underestimate human greed and payment delays. You may find yourself doing work and not getting paid, and being in a foreign jurisdiction uncertain about lien laws and how to proceed with a legal dispute.

You may be from a state where notice is not required and now working in a state where there are strict notice requirements (see our map of preliminary notice requirements). You may have a lot less time than you think to file your lien.

Take the time to learn the lien laws for the state where you’re performing work. We have all 50-state’s lien laws indexed and summarized on the Zlien website, and available for you to peruse for free. Plus, consider subscribing to our LienPilot, which will help you manage all of your new projects and the notice or lien requirements for those projects. With our LienPilot, you simply type in your project information and our system automatically calculates the preliminary notice required for the project, as well as the deadlines for delivering notices and filing liens. When it’s time to file a mechanics lien or preliminary notice, you can do it with just a click of the button.

You’ll be plenty busy with all the extra work in these storm locations – don’t spend unnecessary office hours fumbling with lien and notice paperwork. But then again, don’t just ignore the lien and notice requirements, because you never know when you’re going to need these tools to protect your company against non-payment.

Posted in: Construction News / Tags: Diaster, Hurricane Irene, LienPilot, Tropical Storm Lee / 1 Comment

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