Construction Lien Laws: A Little-Used but Valuable Engineering Tool

Design professionals often overlook a valuable tool they can use to collect their accounts receivable; the construction lien laws of the state where a project is located can help a firm collect sums owed for work or equipment delivered. The first construction lien law was enacted in Maryland in 1791, and since that time, the other 49 states have adopted similar laws for the protection of co...

By Bruce H. Schoumacher, Querrey Harrow, Ltd. Chicago July 1, 2001

Design professionals often overlook a valuable tool they can use to collect their accounts receivable; the construction lien laws of the state where a project is located can help a firm collect sums owed for work or equipment delivered.

The first construction lien law was enacted in Maryland in 1791, and since that time, the other 49 states have adopted similar laws for the protection of contractors. However, most states allow not only contractors, but also design professionals and equipment vendors to file liens.

Under the contractor-based lien laws, contractors are permitted to file a lien against the property for sums owed to them. Liens not only apply to the land, but also to land improvements. If the lien is not paid, then in most jurisdictions, a contractor may file a suit to foreclose upon the lien, requesting the court to sell the property to pay the lien. If the court finds that the lien is valid, then the court will order the property to be sold and the proceeds of the sale used to pay the lienholder.

Know your rights

Although many contractors are aware of their lien rights—and will readily file liens—design professionals have generally not been as aggressive. Too often engineers limit their collection efforts to sending invoices and follow-up invoices or otherwise contacting clients or customers when bills are overdue. Even if design professionals are aware of their lien rights, many are reluctant to file liens for fear of alienating a client who may generate more work for them.

But engineers should realize that a lien can be an excellent tool. Even if the lienholder does not file a suit to foreclose on it, the mere existence of a lien may result in payment of the receivable.

For example, developers and owners of new construction may be pressured by lenders to keep the property clear of liens. This may result in the lienholder being paid just so the owner or the developer can remove the lien from the property.

Of course, if the owner or developer plans to sell the property after construction is completed, there is another incentive for paying the lienholder. Obviously, a buyer will not purchase the property if there are liens against it; also, a title insurer may not insure it.

Lien laws vary from state to state

Unfortunately, however, there is no uniform lien law. Each state has its separate lien law and the contractor or engineer must comply with the requirements of the state law where the project is located in order to create a valid lien.

Generally, the state lien statutes provide for the party seeking to enforce the lien to give notice to the owner and other parties of its claim before filing it, usually with the recorder of deeds in that county. The mechanics lien must describe the property and the amount owed.

These statutes also usually draw a distinction between private property and public property. For most private projects, the creditor is allowed to actually lien the real property and improvements on it. However, for public projects, lien rights are much more limited, with the creditors usually restricted to placing a lien only upon funds available to pay the general contractor. The obvious reason behind this is that the sovereign does not want actual public property subject to liens as it is with private property.

Because the state laws governing construction liens vary significantly, the creditor should contact an attorney in the state where the project is located. An attorney experienced in the respective state statutes can walk a creditor through the process.

Creditors should also realize that construction lien statutes have certain critical deadlines that must be met. Typical deadlines require that the lien be filed within a period of time that is sometimes relatively short. Furthermore, many states require that the creditor file the notice of intent to lien upon owners and others during an even shorter period of time. Thus, it is important to be aware of the significant requirements of the state, paying particular attention to deadlines.

If the creditor waits too long to start the lien process, then they are treated as any other creditor and cannot file suit to foreclose on the property. Instead, the creditor must file a suit to collect the sum owed from the party with which it has a contract.

Many states also have laws invalidating “fraudulent” liens, which are those determined to be deliberately overstated. Sometimes, creditors may attempt to inflate the amount of the lien for negotiating purposes. However, the courts do not condone such behavior and frequently invalidate these liens.

Final considerations

Design professionals should realize that construction contracts frequently contain “no lien” provisions. Some states will enforce these in written contracts while other states will not, usually because the relevant lien statute provides that “no lien” provisions are unenforceable.

Engineers should also keep in mind that while liens are a good tool to consider, a project’s fees may not have been paid because the owner may think that there was some deficiency in the performance of the work. Accordingly, before filing liens, engineers should review the project to determine whether they may draw a counterclaim and potential litigation from the owner or general contractor for breach of contract. The risk of such a counterclaim may deter a creditor from filing a lien.

Project Collaboration Sites: A Risky Proposition?

At the annual ZweigWhite AEC Internet Strategies Conference in Chicago this June, sessions featuring information about extranets and project-collaboration Web sites drew the most interest. Based on the questions asked and material presented at the conference, design and construction firms are in a state of flux with respect to this new technology—they know they need to use it and they can see the benefits, but they’re not sure how to best take advantage of it.

In addition, the instability of the dot-com market has thrust more uncertainty into an already confusing situation. The technology downturn has prompted many service providers to lay off employees, revamp their organization structures or file for Chapter 11.

Many potential users of project-collaboration tools are understandably concerned about spending the money and time necessary to align themselves with a provider, only to have that provider go out of business. Users of, for example, found out how disconcerting that can be one morning last September; when they logged on, they found the following message: “We have ceased operations. We hope this isn’t an inconvenience.”

What steps can be taken to ensure that the chosen extranet provider will still be there when the project is wrapping up? A firm can start by doing the following:

Talk to users. Talking to industry peers who use the sites will provide a better idea of which products are easiest to use, which have the best pricing options and which provide the best customer support.

Look at past, present and projected financial performance. After narrowing down the list, take a look at each vendor’s past financial performance and projections for the next year. Perform some due diligence and have a contingency plan that includes an alternate provider. Are they profitable now? Are they burning through venture capital without replenishing the money supply?

Plan for the transition. When deciding to integrate new project-collaboration technology into a firm, it’s important to realize that the adoption process can be tough. This was another common topic at the conference—how to get people inside and outside the firm to embrace this new technology. The answer is to ensure that the benefits are clearly explained to everyone involved, and to have a champion whose role is to help users through the rough spots and to make sure everyone’s using these tools the way they should. Everyone in a firm will not immediately embrace new, different ways of managing projects, especially if the old ways were making money.

Project collaboration tools offer many benefits to construction projects and to project teams. Knowing how to use them, working together and using the right tools for the right jobs are the keys to success.

The bottom line is that the use of project collaboration tools is only going to grow. Better get used to it.