Many, if not most, business decisions are made by doing some sort of cost / benefit analysis. While this type of assessment comes in many flavors (i.e., a straight up financial calculation, or an expected return on investment), one approach that goes a little bit deeper is a Risk / Reward analysis. For the purposes of this article, the reason why we say that a Risk / Reward analysis goes “deeper” is that this type of analysis can contemplate more variables other than just monetary costs and returns — things like “business reputation,” or “relationships” (business related or otherwise).
And so, keeping this broad understanding of a Risk / Reward analysis in mind, we want to answer the question of whether there are any risks to filing a mechanics lien? Please read on for our conclusions.
What’s the Risk of Not Filing?
Before we talk about the potential risk of filing a mechanics lien, let’s step back for a moment and talk about how you got to the point where you’re thinking about a mechanics lien in the first place.
Chances are, if things have gotten to the point on one of your construction projects where you’re thinking about a mechanics lien, then you’re probably worried that you might end up not getting paid some or all of the money that you’ve already earned.
The details of your particular situation will of course vary, but there are a few key points that are going to be pretty important:
- How and why did it get to this point?
- How much money are we talking about?
- What will happen to your company if you don’t end up seeing any of the money?
- How well do you know, and how long have you worked with, this customer?
- Does your customer have the ability to pay you, or is there something going on with their finances?
Some people worry that filing a mechanics lien might damage their business reputation, or might negatively impact their business relationships. To that, we say this: if a non-payment situation is bad enough that it might end up putting you out of business, then you won’t even have a reputation to worry about or a relationship to protect — you’ll be gone!
The bottom line is this — before you worry about the risks of filing a mechanics lien, be sure to think long and hard about the risks of not filing the lien. If filing a lien is the difference between getting paid or not getting paid, then you must figure out if can afford to take the hit (if you decide not to pursue the lien).
Note: Of course, this all assumes that you’ll be allowed to file a mechanics lien. In order to find that out, you’ll need to check to see if you’ve met all of the lien and notice requirements for your state.
Before Filing, Try Sending a Notice of Intent
Nobody wants to have to file a mechanics lien. It’s a serious step that indicates that there’s a pretty dire, potentially desperate non-payment situation going on. But “desperate times call for desperate measures” as they say, and sometimes, a lien is exactly what’s called for.
However, sending a Notice of Intent to Lien might do the trick and prompt payment without having to file a lien at all. Sending a Notice of Intent to the party that owes you the money, to the prime contractor on the project, and to the property owner will definitely get everyone’s attention. It should get the property owner breathing down your customer’s neck, and your debt will become a priority.
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Managing Lien Rights Is About More Than Just Filing a Document
When you’re worried that you may not get paid on a project, it’s a really tough situation to be in. Depending on the size and impact of the potential loss, your business’ viability may even be at stake. But when it’s gotten to this point, you are forced into an inherently reactive posture — you’re threatened with non-payment, so you react by filing a mechanics lien (and rightfully so).
However, filing a mechanics lien is actually the 3rd step in a 3-step process. Those three steps are:
Step 1: P = Preliminary Notice
Step 2: I = Notice of Intent
Step 3: M = Mechanics Lien
We call it the “PIM” method, and here’s the thing about using it — if you do a good job sending preliminary notices on all of your jobs, and then follow up with a notice of intent to lien on problem jobs with payment issues, then you’ll hardly ever have to even go to step 3, which is filing a mechanics lien.
Or in other words, following the PIM method (and really, just steps 1 and 2 of the PIM method) is almost always enough to get most folks paid without having to do anything else. The reason is, none of your customers would want to risk it by not paying you, since they know that you’ve already secured your lien rights and will be in a position to file a lien should you need to.
Hopefully you will never have to face a non-payment situation on a project. But by taking a proactive approach to your payments by using the PIM method, you’ll probably prevent a non-payment situation from happening in the first place.
