If you have worked in the construction industry for any amount of time, you know that payment is not guaranteed. You also know that even if you are paid, it is often later than originally promised. This is because the construction industry runs on credit. You provide labor and materials that you pay for, then wait to get paid. The stars must align just perfectly for you to get paid on time. This has actually been an issue in the construction industry since the founding of the USA.
The History of Liens
Lien rights were brought to the USA because no tradesmen wanted to work to build the Capitol Building and then wait to get paid by a brand-new country that was not financially sound. In fact, Thomas Jefferson gave these tradesmen lien rights to secure the amounts they were owed for the labor and materials they provided. Liens were the leverage they needed to feel secure enough to build our country’s Capitol. The actual rules that must be followed to have a valid lien have changed since then, but the idea that you can secure your right to payment with a lien is still the same.
Extending Credit in Construction
When you work and then wait to get paid, you are extending the party that hired you credit. This means that you provide the value of your labor and materials, and the party you worked for is indebted to you. There are two distinct types of credit/debt: secured and unsecured. When the party that hired you does not pay, and you have a claim against them for nonpayment, you can take them to court and get a judgment. This is unsecured debt. Under the same circumstances, suppose you are not paid for your work and materials provided, but this time you follow the steps to have a valid lien against the property that was improved by your labor and materials. The lien gives you a secured debt.
A lien gives you an ownership interest in the property for the value of the labor and materials you provided. The ultimate remedy of your lien is a lawsuit to foreclose your lien and force the sale of the property to pay you the amount that you are owed. When you file a valid lien you have both a secured claim against the owner of the property and an unsecured claim against the party that hired you. Having a consistent collection strategy that incorporates the steps required to have a valid lien will dramatically improve your cash flow and will get you the closest you can get to a guarantee of payment in the construction industry.
Mastering Your Write Off
When I was in my last year of law school, my husband and I started a material supply business. The success of our business relied on me learning to collect our money. When you must learn something out of necessity to save your own business, you get exceptionally good at it over time. I can tell you that business is still alive today and thriving. It has a gross revenue in the tens of millions, and it writes off far less than .01%. And yes, that is a period and a zero in front of the one. If there is only one thing about collections in the construction industry that you take away from this article, I want it to be that the squeaky wheel gets paid first. By this, I mean that if you become known for always sending the proper notices on time and filing valid liens, you will likely get paid before everyone else.
A Word of Warning
Liens offer a great advantage. Having a lien against someone’s property is immensely powerful. It can allow you to stop the owner from selling the property or getting a loan. However, a word of caution is necessary; if you file a lien that is not done properly there are some pretty stiff penalties. Not only will you not get paid the amount you are owed, but you could have to pay a $10,000 penalty, the other side’s attorney fees, and damages caused to the owner by your invalid lien. All these costs could easily reach hundreds and thousands of dollars. It is also worth noting that I have never seen a lien done properly by an online lien filing service. Lien laws are very complex and are completely different from state to state. That amount of nuance requires dedicated attention. It is worth the investment of finding an attorney that is familiar with the lien laws in your state to handle your liens and collections strategy.
Payment is not guaranteed in the construction industry. That is why it is essential for contractors to fully understand their rights, and know what they can do to increase their chances of getting paid what they are owed for a project. Don’t let your pay get away from you; take the initiative and contact a construction attorney that knows the lien laws in your state. Liens are your leverage and filing them properly can make all the difference between getting your paycheck in your pocket or being stiffed by the hiring party. Get paid what you are owed by creating a collection strategy today.
About the Author
Published author, award-winning lawyer, devoted wife and mother to three girls, and Owner and seasoned Managing Partner of The Cromeens Law Firm (TCLF), Karalynn Cromeens is a true jack of all trades. Karalynn is the Co-Founder of Morrell Masonry Supply and Owner of The Subcontractor Institute, an easy-access online educational platform for contractors. In addition to TCLF, and The Subcontractor Institute, she is also the Host of the rapidly growing educational construction podcast, Quit Getting Screwed - making cost-free industry insight available to contractors across the country. In 2021, Karalynn published two Amazon Best-Selling books - Quit Getting Screwed: Understanding and Negotiating the Subcontract and, in September, Quit Getting Stiffed: A Texas Contractor's Guide to Liens & Collections.
In the seventeen years she has practiced construction, real estate, and business law, Karalynn has reviewed and explained thousands of subcontracts. For years, she has tried saving companies that have signed problematic subcontracts and lost out on being paid for their work. Unfortunately, it was too late by the time they came to her; she could do nothing to help. She hated seeing clients lose money—sometimes their entire business—over language they did not understand and laws they did not know about. Watching these situations play out day after day was the driving force behind her two books, The Subcontractor Institute, and the firm's accessibility efforts. Providing education to contractors on a national level has become Karalynn's personal mission, and she is always doing what she can to help make it a reality.