Protecting lien rights is often an afterthought, an unfortunate reality seeing as how oftentimes it’s too late to seek relief amid payment discrepancies on a job. And while lien rights and processes differ from state to state, there are general steps contractors can take to protect themselves.
“If you do construction work, if you don’t get paid for whatever reason, you deserve to get paid and you do have rights to protect yourself,” says Paige Centa, senior account executive at Levelset, which helps contractors and suppliers get payment under control. “The trouble becomes when you have to do it correctly.”
Getting paid on time can be a struggle, which in turn increases the difficulty of growing one’s business. Not to mention, a lack of education on the subject increases the likelihood of having to bring in a costly attorney to assist for extended periods. For smaller companies, that can be quite a hurdle.
“How can you grow your business when you’re in this constant cash flow balance of when am I going to get paid,” asks Centa.
There are several misconceptions surrounding liens, says Centa. While generally a good idea, written contracts aren’t required in most states. Nor do those contracts translate to lien rights. Just because a supplier protects their lien rights doesn’t mean yours are protected as well.
“You have to protect your interests every single time,” says Centa. “Filing a lien is a powerful tool, but the harsh reality is you can’t just file a lien at any time or for any reason. There are really strict deadlines you have to get right, or else you’re out of luck.”
While laws, steps, requirements and deadlines vary from state to state, there are several general ways to protect lien rights. The first is to ensure everyone knows you’re on the job by sending a preliminary notice. Centa says that notice provides visibility, speeds up the payment process, builds good relationships and prevents having to file a lien.
“You have to open that line of communication with all of the stakeholders on the project,” says Centa.
The next method of protection is taking advantage of financing designed specifically for contractors. Centa says only 8% of construction payments in the U.S. come within net terms, whatever they may be.
“You can ask your supplier for terms, you can ask for deposits, maybe you have a line of credit,” says Centa. “Those are all ways you can buy yourself cash flexibility so that you can kind of cut yourself out of this burden.”
Centa also recommends streamlining the liens process.
“Whatever way works for you, it has to be consistent,” says Centa. “It has to be a process, much like anything you do in your business, has to happen the same way every single time. Otherwise, things fall through the cracks.”
Contractors should not only learn the deadlines and processes for their respective states, but also begin looking at lien considerations before they think they have to.