Lien Laws and Construction Accounting

The purpose of this article is to discuss construction liens (also known as mechanics' liens) and how construction accounting is a vital component in reducing the risk of not getting paid for labor or materials expended on construction projects. However, before delving into that discussion, we must first address an essential aspect of dealing with the legal side of construction liens.

While, when followed correctly, lien laws create a legal claim on the property’s title, there is no federal standard. In other words, each state's statutes are independent and must be followed precisely.

For that reason, we suggest contacting either an attorney with expertise in lien laws or a lien law consultant in the state in which you conduct business. These consultants are often referred to as a Lien Resolution Specialist, Lien Negotiator, or a Lien Resolution Consultant. 

Lien Laws and Construction Accounting

Lien laws serve as powerful leverage to get the general contractor or owner to pay, but they come with strict deadlines and notice requirements. Therefore, there must be proper financial documentation concerning all transactions and expenditures.

A lien is a powerful tool for securing payment, but it is typically a last resort. Unpaid invoices that may result in a lien must be carefully tracked and managed to avoid potential issues. In fact, the process of sending preliminary notices and collecting lien waivers is a crucial part of construction accounting, enabling the management of receivables and ensuring a healthy cash flow. Therefore, unpaid invoices that may lead to a lien must be tracked and managed carefully.

Note: It is essential to understand that contractors may need to complete paperwork upfront to preserve their lien rights, LONG before they actually need to file a mechanics lien.

Meticulous Construction Accounting

Meticulous construction accounting and lien laws work hand in hand to help enforce a lien. Construction contractors must prove they contributed to the project. They must document all labor, materials, and services provided for a specific job. In that respect, job costing and expense tracking are not options; they are fundamental to delivering the necessary proof. Inaccurate record-keeping can weaken a lien claim.

Impact of Lien Laws on Construction Accounting

Construction lien laws significantly impact construction accounting because they require: 

• Meticulous tracking of finances. 

• Strict adherence to notice deadlines. 

• Diligent collection and management of lien waivers.

• Once paid, the provision of a lien release (waiver) to clear the property's title.

Lien management is a core part of project financial controls and risk mitigation for construction businesses. Furthermore, lien management (including notices, waivers, and filings) must be integrated into accounting systems and processes rather than treated as a separate legal function, to ensure project financials are managed effectively.

Disruption with Lien Laws and Construction Accounting 

Lien laws and construction accounting come into play when revenue recognition and project profitability are involved. Let’s face it, liens can disrupt cash flow and lead to legal costs, which directly impact a project's profitability. If a contractor is not paid and is forced to file a lien, the associated legal expenses and delayed payments must be accounted for. 

Leaning on lien laws must include inclining your accounting team to the task. (I couldn’t help myself, I just had to say it.) 😉

Ambitious Construction Contractors look to The Profit Constructors to provide advocacy in dealing with:

• Clients and customers

• Employees and subcontractors

• Vendors and service providers

• Governmental entities 

Working with The Profit Constructors gives Construction Contractors the means to organize their operations in ways that help them:

• Remain informed

• Avoid hassles

• Reduce risks

• Be future-ready

Ready for action? Or want to know more? Contact us today to schedule a complimentary discovery call. 866-629-7735