This news story is a great case study to material suppliers and subcontractors as to why they should preserve and enforce their mechanic lien rights.  Here’s what this news story demonstrates about the power of a mechanic’s lien:

Mechanic Liens Are Effective and Encumber Property

“If you have a lien put against your house, you cannot refinance, you cannot sell your house, and you cannot obtain a new home equity unless that lien has been satisfied.” — Barbara Lotz, Homeowner

While this is demonstrative of a mechanic lien’s principal effects, it’s worse that Ms. Lotz reports, and that’s because if the lien remains unpaid, the home can be put on the auction block and sold to pay off the debt.  That’s a very powerful payment mechanism.

Mechanic Liens Create Payment Triangles That Result In Getting You Paid

If you listen to the news story, it is clear that the group of homeowners confronted with mechanic liens had hired the same Texas roofing company to install their roof (Prime Roofing) and had paid that roofing company in full. The Texas company took the money and scuttled back to their hometown, all the richer.

While really unfortunate for these particular homeowners (who should have required lien waivers before issuing the Prime Roofing any payments), the fact that the homeowner paid Prime Roofing does not excuse their liability to ABC Roofing. When mechanic lien laws are utilized, material suppliers and subcontractors recieve ultimate payment protection.  The homeowner will be required to pay a debt twice, and then be left with the burden of pursuing payment from the general contractor who didn’t properly organize payment.

This payment triangle results in getting suppliers and subcontractors paid.  When the prime contractor is still around and the property owner still owes it money, the property owner will pay off the lien and withhold that money from the prime.  When the prime is gone and already paid, the property owner will have to pay the lien (because they’ll lose in suit) and then file suit against the prime to get some money back.

In either event, the subcontractor or supplier is paid.

Mechanic Liens Can Get The Right Kind Of Attention

This story from the Pittsburgh CBS affiliate demonstrates that mechanic liens can get you the right kind of attention.

Two good things happened for ABC Supply Co. after filing this mechanic’s lien.  First, Prime Roofing is now the subject of a negative news story, which will affect their business and put pressure on them to pay ABC Supply.  Second, Prime Roofing is now evidently the subject of a government investigation for contractor fraud.  Again, this will put pressure on the company to pay ABC Supply.

“We’re just doing what we do all the time.  If we’re not paid, we have lien rights. I’m very sorry these homeowners paid their bills and did not have the contractor ultimately pay for their materials.” — Karl Leo, ABC Supply Chief Legal Officer

All in all, this news story demonstrates why it’s a great idea to file a mechanic’s lien. It’s something that we’ve written about here in the past (a lot).  Take a look at our articles by reading through the “Why Lien” tag.

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.

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!

Many folks file a mechanic’s lien and then ask, what now?  Or maybe they wonder what’s so special about the mechanic’s lien instrument.  This white paper discusses 5 main effects the mechanic’s lien has on any construction project, explaining how these effects result in getting you paid.

Money problems on these types of projects is not surprising these days. To me, however, what’s astonishing is this tidbit from the article:

Whitcomb’s company has filed a construction lien against the arena to make sure it is paid the $63,476 still owed. Records show that at least four other companies have also filed construction liens on the Amway Center, ranging from $7,741 to $352,331.

Others haven’t yet taken the legal step of filing liens, but have asked Orlando officials for help in collecting debts as high as $2 million.

It’s beyond me why companies owed significant sums of money on a construction project won’t take the simple step of filing a mechanic lien. Time and time again we’ve posted on this blog that you only get one chance to file a lien, specifically writing an pointed article title: “Promises to Pay Mean Squat to your Lien Deadlines.”

Filing a lien has very clear advantages – check out our “Why Lien” tag here for some talk on how a mechanic lien can help get you paid.  And don’t be one of these companies who ask for help collecting their debts but don’t spend the time and money to file the lien instrument.

As March draws to a close, so too does the first quarter of 2011.  Ask yourself: How is your company doing?

Accounts Receivables Basics

Accounts receivables can be a four-letter word in the construction industry. Especially in these cash-strapped times, so many companies fall financially short on projects, which can leave innocent suppliers or subcontractors waiting weeks or months for overdue payments.

It’s important to keep two principals in mind when confronted with an overdue account:

1) The earlier you start collecting, the more likely you’ll collect; and

2) An unpaid account can cost your company a lot of revenue, as it takes a lot of revenue to make up for missed profit.

We’ve written about collection laws, tips and practices on the Construction Lien Blog in the past, which you can read here. It might also be helpful to read some blog posts from another blog I author, the Construction Law Monitor, which also has a “Collections” category with similar posts.

How Mechanic Liens Help

One bright spot for the construction industry is mechanic lien laws. Unlike nearly any other industry, folks in the construction industry can secure their receivables by keeping up with mechanic lien and preliminary notice requirements.

A few years ago, we wrote a blog post called: Three Reasons Why It’s Critical To Lien.

In large part, this post addressed how filing a mechanic lien can help your company collect on outstanding accounts. Two of the three reasons being most pertinent:  Liens freeze funds and Liens get all parties involved.

Filing a mechanic lien stops the flow of payments on the project, which can result in getting your company paid quickly. The filing also gets parties who might not otherwise care about your debt (i.e. the property owner), to care a great deal.

Why are mechanic liens so effective? Because when done correctly, they can legally obligate parties (like property owners) to pay the lien amount even when they haven’t breached their contract with the other party.

Let me explain this with specifics. A window supplier supplies windows to a prime contractor for use on a project. The property owner pays the prime contractor for the windows, but the prime contractor doesn’t pay the window supplier. If the window supplier properly files a mechanics lien, the property owner may be obligated to pay the window supplier for the windows, even though s/he already paid the prime contractor for the same windows!

This precise scenario happened in Oklahoma City on a residential construction project, and a news program sympathized with the homeowner producing the below news story. While it’s unfortunate what happened to these property owners, this news report does a good job of demonstrating how effective a mechanics lien can be:

Well, Atlanta-based roofing company American Shingle just filed for bankruptcy (bankruptcy filing legal docs here), and they are illustrating this same point on a tiny scale.   Instead of a billion dollar mega-project, mechanic liens are affecting residential properties across Georgia and elsewhere.

Folks frequently ask me: what’s the benefit of filing a mechanic lien?

An article I wrote in February 2008 answers this question in detail, but for the purposes of this discussion about American Shingle, here’s an excerpt:

If you’re unable to get paid on a construction project, you have a legal remedy under contract law only against the person who hired you.   A mechanic lien, however, completely changes this paradigm.  With a lien, you can sue the person who hired you, along with the property owner – regardless of how far you are down the contracting chain [depends on state laws].

What this means for the American Shingle situation is highlighted by a news story from the Atlanta NBC Affiliate 11 Alive:  American Shingle Customers Could Pay Twice.

Unlike the 11 Alive story, the Construction Lien Blog focuses on creditor’s rights (versus consumer rights).   If you’re a consumer, you can check out the “Consumer Ed” resource published by the GA Department of Consumer Affairs, which has information on liens.

For creditors, however, the American Shingle situation is a good lesson.   Protect your lien rights by sending required notices and filing your liens within the legal time frames.   You never know when companies may run into financial difficulty and file bankruptcy (American Shingle was a pretty big company).   When something like this happens, your lien rights will be invaluable.

Related articles by Zemanta

• Liens Make Your Payment Problem the Entire Project’s Biggest Problem (constructionlawmonitor.com)
• American Shingle files for bankruptcy (walletpop.com)
• Preserving and Executing Lien Rights Leads to Prompt Payment (constructionlawmonitor.com)
• Why Lien? – The Why Lien tag at Construction Lien Blog

But if a homeowner (or other interested party) files a bond in response to the lien, does that defeat the purposes of the lien itself?

Quite simply, no.

What is a Lien Bond?

Most mechanic liens statutes give property owners and other interested parties in a construction project the ability to file a bond in response to a party’s filing of a mechanic’s lien.   Most states require the amount of the bond to equal more than 100% the lien claim.

In Louisiana, for example, a lien bond must be 125% the amount of a claim.   In Washington, the bond must be 150% the claim amount.

The bond itself is deposited with the recorder or clerk’s office and theoretically “takes the place” of the lien. A filed bond, therefore, usually has the effect of eliminating any barriers to the sale or transfer of property and nullifying any rights to sue parties without contractual privity.

So, if a lien can be bonded and all of the lien’s benefits nullified…what’s the point of the lien?

The Bond’s Benefits

While the lien bond acts to nullify some positive aspects of a party’s claim of lien, it does not defeat the purpose of the lien statutes.   The claimant loses some benefits of the lien itself, but it gains the benefits of the bond.

Here are some benefits of the bond:

• The entire amount in dispute (plus an additional amount – 25%, 50%, etc.) is filed with the court, and is securely awaiting determination of ownership.   This means that upon a court award, you won’t have to spend any money “collecting” the judgment.   The money is there.
• The lawsuit to foreclose or enforce your lien becomes a lot less complicated.   Sometimes, a subcontractor’s lien claim can include a handful of parties (owners, GCs, suppliers, etc.).   The more parties in litigation, the more expense and procedural hurdles.   When a lien is bonded, it reduces the litigation to a one-on-one dispute and narrows the scope (and expense) of the action.

In short, while a bonded lien does not prevent the sale or transfer of property and may reduce the number of parties a claimant can sue….the bond also eliminates the need for those remedies.  It places the entire amount in dispute (plus sum) into the reach of the claimant, and the claimant can move forward in a clean and uncomplicated procedural action to recover the funds.

If your lien is bonded, it has already succeeded to some degree (it has produced the cash).  Now, it’s only a matter of proving that the cash is yours.

Just recently, a prospective customer called us and asked:  what are the chances of getting paid after filing a lien?

Unfortunately, it’s impossible to provide a success percentage because each situation is different.

However, mechanics liens are far and away one of the most effective ways to secure payment for your company.

To put it simply then, we can only point out the obvious in response to this question.   The obvious answer is that filing a mechanics lien is a first, and oftentimes necessary, step to get paid on a problem project.

Without a recorded lien, your company is simply a bystander to the project’s payment obligations, and is pinning its company’s rights to payment on good fortune.

Filing a construction lien isn’t extraordinarily expensive, and it’s a step in the right direction for your organization.  Get to know the lien deadlines and laws for the state where you performed work, and then make a move to protect your company by securing your lien.

File a lien today and get payment to come your way!  Lien SMARTER…..to get paid.