Getting paid in the construction industry can be a hassle. Fortunately, there are instruments designed to protect against nonpayment.
In particular, state laws grant contractors, suppliers and other parties the ability to file a mechanics lien claim or bond claim. These tools are very effective at helping claimants collect on late, unpaid invoices.
While filing a claim can be the difference between getting paid or not, claims do present their own risks. Like anything else, deciding whether to file a claim involves weighing the risks against the rewards.
Reward: The Claim Results in Payment
Filing a claim has one big reward: getting the claimant paid. A recent zlien survey found that 64 percent of claims resulted in payment within 60 days, without any further action needed.
The other “reward” associated with filing a claim is its relative low cost. Filing a claim is less expensive than beginning a contractual lawsuit or enlisting a third-party collections agency. A claim requires fewer resources; lawsuits and collections demand time and energy from employees, and have indefinite timelines. So, what’s the downside?
Risk #1: Damaged Customer Relationship
Potential claimants sometimes fear that filing a lien or bond claim will damage their relationship with a customer. This is a valid concern. Some people do abuse lien and bond claim rights, and filing a claim the “wrong” way may give a customer fair reason to be upset.
On the flip side, if a contractor is considering filing a claim for the right reasons, he or she has likely been wronged with late payment. Thus, it begs asking whether the customer has already soured the relationship. If the answer is yes, the risk of filing a claim is minimized.
Of course, there are grey areas. A subcontractor might not receive timely payment because the general contractor has not yet been paid. Perhaps another subcontractor’s work has delayed payment to the general contractor or the quality of work might be disputed. While there is no cut-and-dry method for evaluating the potential damage to a relationship, there are some dos and don’ts to abide by when filing a claim to minimize the impact on the customer relationship.
- Communicate often with the customer about payment prior to filing the claim.
- Follow preliminary notice requirements.
- Give fair warning with a notice of intent to lien, to all parties affected by the claim (this often includes the property owner and general contractor).
- File a surprise claim.
- File a claim prematurely, without giving others a fair chance to resolve the issue.
Risk #2: The Claim Does Not Result In Payment
A 64 percent chance of getting paid is pretty good, but it means that 36 percent of claims required enforcement or collections or were not paid until later (or were not paid at all). Ineffective claims present their own set of follow-up options, each with its own risks and rewards.
- Enforce the claim in court: Lawsuits can be expensive and time-intensive. Attorney’s fees and other charges also might end up costing more than the debt in question. On the bright side, many states reward successful lawsuits with reimbursement for these fees. However, there is no guarantee that a lawsuit ends with the desired result.
- Send the debt to a third-party collections agency: The fee for collections can be steep, though many agencies will only take a cut if they succeed in obtaining payment. At the same time, many agencies will not accept a debt that is too small. If the agency utilizes the claim in its efforts to collect, the claim feels worthwhile. If it doesn’t, the claim feels like a wasted attempt to gain payment.
- Let the claim be: In this scenario, the claimant makes no further financial commitments to obtaining the debt, instead relying on further communication and good luck. Note, however, that some states require claimants to release a mechanics lien.
Filing a Claim Without Following Preliminary Notice Requirements
Most states require claimants to send some sort of preliminary notice in order to file a valid lien or bond claim. Filing a claim without meeting these requirements presents an additional layer of risks. An invalid claim is a bluff. It is a bet that the property owner and customer are not aware that the lien is invalid. If they call the bluff, then the claim was likely made and paid for in vain.
Filing a mechanics lien claim or bond claim is not a guarantee of immediate payment, but these tools have proven effective. Filing a claim has its risks. One such risk is potential harm to the relationship between the customer and the claimant. The other chief risk is net financial loss: The claimant may pay for a claim that doesn’t work.
On the other hand, claims offer significantly lower risk than comparable, alternative options. Lawsuits and third-party collections efforts require significant time commitments, let alone steep financial costs.