Whether you make the first offer in a lien negotiation is a difficult decision. On one hand, there is the group that says you should never make the first offer. The reasoning is that the first offer provides insight into what the party is thinking and where the negotiation may go. They reason that if you make the first offer you are giving up too much to the other side.
On the other hand, the other group says you should always make the first offer. This group argues that you lead the negotiations and set the tone with the first offer. They believe you should be aggressive and come out first with a strong “anchor.”
Anchors Aweigh
The key factor in determining whether you should make the first offer depends on how much information you have. If you believe you have good information about your position and the other side’s position, making the first offer can be a powerful way to set the stage for a successful lien negotiation.
For example, negotiation studies consistently show that aggressive, but reasonable “anchors” in negotiations set the stage for how negotiations are ultimately resolved. In one study of the real estate business, the researchers allowed several professional real estate agents to view a home. The agents were given recent comps in the area, the size and dimensions, the year it was built, and amenities. The only difference shown to the parties was that “listing price” shown to each agent was randomly assigned to a low of $119,000 up to a high of $149,000. The agents were then asked to state the value of the house. The agents who were told the listing price was $149,000 consistently stated that the value of the house was higher than the agents who were told the listing price was $119,000. Anchors make a difference.
Leaving Money on the Table
However, you can make a mistake when making the first offer. For example, let’s say you are a lighting supplier and have provided lights to a general contractor for installation at an invoice price of $22,000. The contractor never paid because it claims the owner never paid. You file a lien for the $22,000. The contractor calls and says it wants to work something out. You think about it and make the first offer, stating you are willing to take $18,000 in full payment in 30 days.
Is this a good deal? Maybe. You are taking off about 18% of your lien claim to try to end the dispute. That’s not too bad of a haircut to take to avoid having to continue on to foreclose your lien, incur legal costs, etc. But, what you didn’t know is that the contractor just received payment in full from the owner and it has all your money. By “negotiating with yourself” you just took $4,000 off the table.
How Do You Decide?
So, how do we decide whether to make the first offer in a dispute where a mechanics lien has or will soon be filed?
Think of it this way. One of the consistent missteps negotiators make is failing to fully understand their own claim. People fail in negotiations all the time because they only look at their claim from an emotional or “thumb in the wind” perspective. That’s how the lighting contractor in the above example started their negotiating…by guessing they could live with an 18% reduction in order to get paid more quickly.
But, if you have already gone through the process of filing your lien it means you have gone through an extensive process of analyzing your claim. You are already way ahead in the negotiation game. In order to meet the legal requirements to file your lien, you have gone through your invoices, sent preliminary notices, complied with all the other steps you had to complete to get your lien on file. You have done more preparation for the lien negotiation than 90% of other people.
In that case, you have a good idea of the value of your position. This weighs heavily in favor of making an aggressive, but reasonable opening offer.
But, don’t unnecessarily leave money on the table in your opening offer. Your claim includes the amounts you asserted in your lien. However, that does not mean that the lien amount should be your starting position.
Further Reading
The 4 Things You Have to Do After Filing a Mechanics Lien
What Is “Enforcing” a Mechanics Lien?
For Your Consideration
Consider the below categories of potential damages to start the lien negotiation:
- Costs that Could Not Be Included in the Lien. There may be costs you incurred that you were not able to include in the lien amount because of a certain aspect of your state’s lien law. However, you may still have valid contract claim for those charges. Be careful here though, because your state’s lien law will always trump any contractual provision you may have.
- Attorney’s Fees and Court Costs. Some states allow parties to charge attorney fees and court costs to collection efforts on mechanic’s liens. Other states do not, however. Be sure to keep up with and include these costs in your starting position if your state allows you to do so.
- Interest. Does your contract allow for interest on unpaid amounts? Include these costs if it’s allowed, both by contract and according to your state’s lien laws.
- Loss of Business. Has this nonpayment kept you from winning or delivering other business? If your contract and state laws allow, you may be able to make a claim for these amounts.
- Internal Time. Has your internal team spent time trying to collect this unpaid amount? If so, you may be able to claim for those costs. Again (and we really can’t say this enough!), you must check your state’s lien law to see if including this type of cost in your lien filing is allowed.
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Please Note — Use Extreme Caution!
While the author’s suggestions here are worth considering, keep in mind that each state’s lien law is different. This means that some states may allow some of these cost categories to be included in a lien claim (meaning, the filed and recorded lien claim document itself), and other states may not. This is extremely important because if you include prohibited costs in your lien claim document, you may end up invalidating your entire lien claim.
While including some or all of the cost categories above may be called for during a lien negotiation, be sure to check your state’s lien laws before including any of these costs in your lien claim itself.
And, you can always send your construction legal questions to us here at Levelset. Our licensed attorneys will answer your legal questions, for free, through our Construction Legal Center. To ask your question, simply click on the banner below.
Conclusion
In a mechanic’s lien dispute, when it comes time to try to make a deal, strongly consider making an aggressive, but reasonable opening offer that includes more than just your lien amount. Also, include the above categories if possible, and you will be in a better position to set yourself up for a successful resolution of your dispute.
Editor’s Note
Many thanks to the author, Burns Logan from Conifac. The information he provided here is not only helpful, but thought-provoking. In a perfect world, settling for anything less than the actual amount of money that you’re owed — the actual amount of money that you earned — just doesn’t seem right. However, we all know that in the real world, negotiations and compromises are how things get done.
One last word…a lien claim is based on a right — a strong, legal right that’s available to members of the construction industry in all 50 states. If you are in possession of a valid lien claim, then you have a very powerful, legal tool on your side, backed by well over 200 years of legal precedent, to be able to get paid everything that you earned. While negotiation and compromise might be called for depending on the situation at hand, don’t ever forget that a lien is more than just a tactic — it’s a right.