Zlien is an Associate Member of the Construction Financial Management Association (CFMA), and a controller for a material supply company recently posed a question to that organization’s LinkedIn Group, inquiring about how others in the group mitigate their risk when supplying materials on credit.
There were 4 or 5 responses to the question, and these responses covered solutions such as personal guarantys, letters of credit and even stronger contract terms. It was surprising to me that no one mentioned the obvious way to mitigate this risk: protecting mechanics lien rights.
Why Controllers Overlook Mechanics Lien Rights
This got me thinking, why do controllers, CFOs and others in the construction industry so often overlook the mechanics lien remedy?
[pullquote style="left" quote="dark"]These laws have been available in our country for over 200 years, and they are there precisely to encourage companies to extend materials and labor to construction projects on credit.[/pullquote] If you are a reader of this blog, you know I’m a huge believer in the mechanics lien. These laws have been available in our country for over 200 years, and they are there precisely to encourage companies to extend materials and labor to construction projects on credit. To promote the growth of our nation’s infrastructure and economy, our nation created mechanics lien laws to stabilize the vulnerability of contractors and suppliers to projects and provide security to all project work and materials.
So if lien rights are the perfect response to this particular controller’s question, why didn’t anyone suggest it? Why isn’t it obvious to the asking controller?
I think there are two reasons for this.
First, the mechanics lien laws are so patchy and confusing across the country that it’s nearly impossible for a company to comply with them. This is especially true for companies who are supplying across state lines as they not only have to deal with the regulations changing from project-to-project, but also from state-to-state. Fortunately for companies, however, the mechanics lien process does not have to be difficult, as Zlien can completely manage mechanics lien and bond claim compliance across the nation.
Second, controllers are skeptical about the mechanics lien process. This skepticism arises for one (or more) of the following reasons: (i) They had a bad experience with the lien process and got burned with a technicality or easily made mistake; (ii) They think a mechanics lien isn’t worth anything if a project is financially strapped because they have a low priority claim; and/or (iii) They think liens are too abrasive and cost too much relationship capital.
Why The Mechanics Lien Can Work For Every Business
Now that we’ve reviewed why controllers sometimes overlook the mechanics lien remedy, let me address some of the issues controllers have with lien laws and explain why the mechanics lien remedy can be a solution for every business.
Mechanics Lien Compliance Management Controls The Complexities
[pullquote style="right" quote="dark"]The laws are too different and too complex, and it’s impossible for a company to comply without some help.[/pullquote] Not to toot our own horn too loudly, but a few years ago we saw lots of problems with mechanics lien compliance. The laws are too different and too complex, and it’s impossible for a company to comply without some help. I repeat, it’s impossible.
So, we created a fix for this by creating the help.
Our industry leading LienPilot application and proprietary administration area that controls lien, bond claim and notice filings understands the laws in every state and on every project and has converted all of these laws to database logic. For the first time ever, a company can affordably manage all of the lien law complexities without the need for a staff, attorneys or clunky software.
Lien Rights Work And Will Not Destroy Relationships
Any skeptisim about the mechanics lien process is misplaced.
First, as to the effectiveness of a mechanics lien, the case is quite clear here. Mechanics liens are effective at getting companies paid, period. Even in the face of a bankruptcy filing or in a mega-project with millions and millions of unpaid contractors, the mechanics lien will make it more than likely that you’ll get paid, and a lot more likely when compared with parties who do not have mechanics lien rights.
Second, as to the relationship capital spent on the lien process, this fear is also misplaced. A mechanics lien is only filed when you are unpaid for a project, and if you’re unpaid long enough to need a lien, you’re not spending much relationship capital there. As to the need to send preliminary notices, it’s inaccurate to think a preliminary notice will scare your client. It will not. When preliminary notice is required, the owner and prime contractor will be getting tons of them, and it’s part of doing business. In some states, the notice is required by law such that you can be fined for not sending one!