Mechanic’s liens are security interests in the title to real or personal property. Contractors and providers of material or labor may use the mechanic’s lien process as a means to enforce collection of unpaid invoices. The process of noticing, filing, perfecting and enforcing mechanic’s liens was established by state law, and the rules may vary by state. In real property terms, the security interest is sometimes referred to as a construction lien, materialman’s lien or supplier’s lien.
Laws enacted to establish mechanic’s lien processes are meant to provide protection to you, the contractor, in the event you are not paid for material or labor supplied on a job. Without a mechanic’s lien on the real property where the contract is being performed, you fall into the category of unsecured creditor if your client does not pay. This usually means that you will get paid little or nothing if the contract property goes into foreclosure.
Mechanic’s liens are particularly important to you if you are a sub-contractor. As a sub, your contract is with a general contractor, not the owner of the property. If the general contractor does not pay you, there is no leverage you can use with the owner if you do not have a mechanic’s lien on the real property. In this case, you are not just an unsecured creditor, but an unsecured creditor of just the general contractor.
The mechanic’s lien process is very specific on what is required to obtain and enforce a lien on real property including:
- Documents and their content.
- How documents are to be filed or delivered.
- Recipients of copies of documents.
- Dates by which documents must be delivered or filed.
Depending on applicable state law, the documents which must be delivered or filed may include:
- Preliminary Notice – A notice to your client, the property owner and construction lender that you intend to file a mechanics lien if not paid.
- Notice of Commencement of Work – A notice to your client, the property owner and construction lender that you intend to start work on the project.
- Notice of Intention to File Lien – A notice to your client, the property owner and construction lender that you plan to file a lien.
- Notice of Claim of Lien – A notice in required public records of lien filed.
As with all legal matters, it is important to seek the advice of legal counsel regarding the requirements of and compliance with mechanic’s lien laws in your state.
Despite the disadvantages of not using mechanic’s liens, some contractors still choose not to protect themselves because of the of the time and effort required to properly administer the process on a manual basis. If you do not have an automated accounts receivable system it can be difficult and time consuming to keep track of the requirements, especially when you have a number of active projects. An automated accounts receivable system with work flow, online notes and automated reminders makes it much easier to administer the mechanic’s lien process.
Automated accounts receivable software, which includes these important features, is available from Lockstep Collect, a leader in the field with a track record of assisting construction firms with billing, invoicing and work flow. If your firm would like to learn more about how you can improve billing, invoicing and work flow please contact Lockstep Collect at www.anytimecollect.com.