My particular area of interest is on helping those in the construction industry increase the success of their collection policies. That is done by implementing a strong and disciplined collections system, and strengthening it by securing each debt with your mechanics lien rights.
Unique Credit & Collection Challenges For The Construction Industry
The construction industry is one of nation’s largest industries, involving tons of parties from specialty building material suppliers to large general contractors. These parties all have unique credit and collection challenges:
- Nearly all of their work or materials are furnished on credit, with payment coming down the construction chain only after performance.
- When furnishing to a construction project, there are multiple tiers of parties, and payments must go through each of these parties’ hands.
- Construction industry is a volatile one, with many underfunded companies “robbing Peter to pay Paul.”
- Attempts to collect construction debts can be complicated by claims “up the chain” for delay or improper workmanship.
- Outstanding accounts can be very large in the tens or hundreds of thousands, making non-payment a potentially crippling concept.
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Unique Security Remedy In The Mechanics Lien
While the construction industry has a lot of credit and collections challenges, it also has an unique remedy in the mechanics lien, allowing companies to “secure” their debt.
What does this mean exactly? Think in terms of your home mortgage. The bank puts out a large amount of money for you to buy a home, and in exchange, takes a “mortgage” on the land. If you don’t pay your debt to them, they will take the property.
An almost identical situation is present in the construction world. Whenever anyone furnishes labor, services or materials to a construction project in the United States, and are unpaid, they can file a mechanics lien. The mechanics lien attaches to the property just like a bank’s mortgage. If payment is not made thereafter, the claimant can proceed to have the property foreclosed upon, and then pay the claimed debt with those proceeds.
Make no mistake, this is a remarkable collections tool. My company levelset – a mechanics lien filing service – did a survey on the effectiveness of mechanic’s lien filings, and found that over 64% of these liens are paid within 3 months of filing and without the need for foreclosure. Compare that to a statistic floated by Michelle Dunn of the Credit & Collections Blog a few years ago on this blog that 80% of American judgments go unpaid.
How To Incorporate A Mechanics Lien Policy Into Your Credit & Collections Policies
If you’re in the construction industry, you should be interested in your mechanics lien rights, and your question now should be one of how, and now why. The Credit & Collections Blog provides a lot of great information on credit policies and collections policies, and your mechanics lien policy should not be a replacement of these. They should merely supplement it.
We wrote a guide a few months ago on our Construction Payment Blog on how to create a Mechanics Lien Policy, with a sample lien policy included for free use.
To summarize, here are some things to consider when implementing a mechanics lien policy:
- Understand your preliminary notice requirements, and contemplating a plan for which projects will get preliminary notices and which won’t, all based on the degree of risk you’re willing to take per project.
- Put your plan in writing
- Monitor your lien deadlines
- Consider Outsourcing preliminary notice and mechanics lien filings.