Whether you’re a new or experienced residential builder, each day brings new opportunities – and sometimes challenges.
Sometimes the challenges are problematic but manageable such as a materials delivery that is a few hours late.
In other cases, the challenge can generate serious repercussions that may be detrimental to your project, your finances and your reputation.
Construction liens are an example of this type of issue.
In the following article, we’ll define a construction lien, explain how it can negatively affect your business, and demonstrate some of the best ways to reduce your risk of encountering this serious issue.
What Is A Construction Lien?
Quite simply, a construction lien (also known as a mechanics lien) is a legal claim filed against the residential builder and their property/new build by contractors, subcontractors, vendors or material suppliers for failure to pay invoices.
Sometimes the bills are unpaid due to the property owner or builder having issues with the quality of the services or materials provided. Instead of refusing to pay the contractor or supplier for unacceptable work or goods, the builder or property owner should take proper or legal steps to rectify the situation – and prevent being subjected to a construction lien.
However, construction liens are also frequently filed against builders because their failure to pay their contractors and vendors is due to poor project management.
As many residential builders are often running the business by themselves, they can overlook payment due dates, forget to confirm work and delivery schedules and misplace important documents.
Negative Effects Of Construction Liens
Regardless of the cause of construction liens, these filings can have some serious consequences for builders.
Below are just a few of the many negative effects construction liens can have on a residential builder:
Construction Liens Can Cause Project Delays
If your contractors or subcontractors have not received payment, then they’ll halt work on your build. Similarly, if vendor payments are late, they won’t loan the equipment the contractors need to complete a project. And if a supplier’s payment is being withheld, they will not deliver any more materials for the build.
All three of these scenarios will result in project delays.
In some cases, the issues may be temporarily resolved if payments are immediately made to get the project quickly back on track, However, many of these third-party providers may insist that future payments be made further in advance to avoid these issues.
Yet, if the late payments are not resolved in a timely manner, these third-party providers will most likely file a construction lien against the builder. When this happens, the project delays could stretch on for a long time.
When projects are subject to indeterminate delays due to construction liens, the in-progress build may experience additional issues such as weather-related damage or theft of materials.
Construction Liens Can Result In Legal Fees & Financial Issues
Another significant concern for a builder impacted by a construction lien, are the legal expenses they’ll incur.
Since a construction lien is a legal claim, builders will need to consult an attorney to determine the best course of action to release the lien and avoid further litigation. Unfortunately, these legal services are quite expensive and could deplete the builder’s finances.
Additionally, if the builder is unable to resolve the issues and cancel the lien, they would have to default on their loan, surrender the property (and potentially lose additional assets depending on the type of loan), and effectively end their professional career.
Construction Liens Can Damage A Builder’s Reputation
Regardless of the outcome of the situation, being subject to a construction lien can permanently damage a builder’s reputation.
Word travels fast between contractors, vendors, suppliers and lenders. If they are aware that a particular residential builder had a construction lien filed against them for failure to pay their invoices, it’s unlikely that they will do business with that builder.
How Can Builders Avoid Construction Liens?
To avoid construction liens due to poor project management, residential builders can take some of the following steps to improve their current situation:
Since late payments are a significant contributing factor to construction lien claims, builders must ensure that all of their contractor, subcontractor, vendor and supplier invoices are paid on (or before) the due dates.
Whether they’re old-school and use physical calendars to track their due dates or they prefer electronic devices to send payment reminders to their phones, builders should take the necessary steps to avoid any disputes over unpaid invoices and construction liens.
Document And Organize
Before any work commences or materials are delivered, it’s important for builders to protect their business and projects via contracts with all contractors, vendors and suppliers. These contracts help lay a protective foundation for the builder in case the work performed by contractors or supplies delivered are unsatisfactory.
Additionally, all invoices, receipts and additional relevant paperwork should be organized for easy access and quick reference in case they are needed as evidence in the event of a construction lien.
Sometimes a project goes off course due to poor communication between the builder and the various contractors, suppliers and vendors.
If there is no effective communication between these parties, then late payments, delays and, worst case scenario, construction liens may occur.
Establishing clear and frequent lines of communication between builders and third-parties helps prevent some of the contributing factors to construction liens.
Use The Right Tools To Manage Your Builds
Clearly, construction liens are potentially devastating to residential builders.
While withholding payments for shoddy construction or low-quality materials is a significant cause of construction lien claims, late payments, lack of documentation and organization, and poor communication may also be contributing factors.
Fortunately for residential builders, Snap.Build’s benefits not only makes securing construction funding easier, it also features project management tools that can help them avoid construction liens and other issues by allowing them to:
- Schedule and Track Payments – Snap.Build’s back office tools allow builders to set-up automatic payments to prevent outstanding invoices. These tools also let builders perform real-time tracking on all previous, current and upcoming payments to ensure that all obligations to third-party providers are satisfied, the project is on target and all work can proceed as planned.
- Manage and Organize Documents – With Snap.Build’s document management features, builders can easily store and organize all contracts, invoices, receipts and other project-related paperwork so there are no surprises that could lead to a construction lien. Easy access to these documents also provides builders with documented proof of payments and other transactions in the event that they receive a construction lien.
- Improve Communication – Additionally, Snap.Build allows builders to view the progress status of each project so they can better communicate with their contractors, vendors and suppliers about timelines, payment schedules and deviations to each project’s scope. By improving these communication channels, builders can reduce the risk of a construction lien.
With Snap.Build, residential builders can enjoy a new way to secure their funding and have their own back-office tools to better manage their projects.