How to develop and implement a preliminary notice policy
Thursday, February 04, 2016
The construction industry runs on credit. As such, most credit departments (and some smaller financial teams) have credit policies that guide when to extend, and how to collect, credit.
A preliminary notice policy sits within your credit policy, describing how to incorporate and protect mechanics lien rights. Specifically, this type of policy details when and how to secure debts using preliminary notices (sometimes called notices to owner or pre-liens), and it expresses your team's philosophy toward lien rights.
The right to file a mechanics lien is a privilege uniquely bestowed upon the construction industry, and for good reason. Because so many construction companies furnish labor or materials on credit, bad debts are all too common.
Consider also that a bad debt is often more costly than the sum of the debt itself, because of the costs devoted to collecting that debt. Lien rights limit exposure to bad debts, and they lower the cost of collecting them.
Sending preliminary notice is like taking out the insurance policy for your right to make a lien claim. If you don't send notice when it's required, you likely won’t be able to file a lien.
Establishing a policy is particularly important when it comes to preliminary notices because they are filed long before payment issues arise. If you wait to send one until after a problem has occurred, it will be too late to be effective. Since preliminary notices must be sent preemptively rather than in reaction to issues, it is much easier and more effective to rely on a predetermined notice policy.
This post will detail how to craft and implement a notice policy, no matter the size of your team.
Step 1: Craft your philosophy
At a high level, crafting your philosophy means deciding how assertive or passive you want to be with sending notices: "We avoid notices when possible because we're afraid of upsetting customers," versus "We secure every debt for maximum protection, no matter how small the amount." Most likely, you'll fall somewhere in between.
At a granular level, crafting a notice philosophy means detailing the criteria for when you will send preliminary notice, and when you will not. At a minimum, this requires answering the following questions:
- How much credit do you have to extend on a single project to warrant sending notice?
- Will you send notice when it is not required?
- How does the risk profile of the customer influence the decision to send (or not send) notice?
The more specific your policy is, the more useful. It's OK, too, if the answers to these questions affect each other. For example, you might decide to send notice when the customer is medium-risk and the amount of credit is high, but not when the customer is low-risk with a high amount of credit.
You'll also want to draft an "exclusion list." This is a list of all customers to whom you do not want to send notice, regardless of the circumstances of the credit. The most assertive companies will have small (or empty) exclusion lists. These are the companies that prioritize protecting financial interests when payments are past due over their relationships with customers.
Step 2: Manage your requirements and deadlines
Every job is unique, and lien laws and precedents change all the time. This means each project needs to be evaluated individually to determine notice requirements.
Fortunately, you can speed up this process by gathering some relevant information. Start by answering the following questions:
- Which state(s) do you work in?
- Which role(s) does your company occupy? (e.g. subcontractor, supplier)
- Which types of projects do you work on? (e.g. commercial, residential, federal)
Once you've answered these questions, you can begin to figure out which projects require preliminary notice to protect lien rights, and when are the deadlines to send those notices. To do so, you can consult a lawyer familiar with lien laws, or consult the lien statutes or lien information. Alternatively, some notice software is able to calculate individual project requirements using basic project data.
Step 3: Define your process and delegate responsibilities
Now that you've decided when you're going to send preliminary notice to protect your mechanics lien rights, it's time to decide how to send these notices. Answer the following questions to get started:
- Will you send notices in-house, or will you hire a third-party company to do it for you?
- Who within your company is responsible for sending notices?
- If you're sending notices in-house, who will draft the notices that you send? How will you deliver notices? Who is responsible for obtaining legal property descriptions?
- Where will you house records of documents you've sent?
- Where will you store mail tracking information?
- How will you know which projects are secure?
As you can see, sending notices can be complicated. The more projects you work on, and the more states you work in, the more complicated it gets.
The list of questions above is by no means exhaustive, but it does provide a framework for building a notice policy that suits your company's needs. Establishing a policy that governs when and how you send preliminary notices will reduce the number of head-scratching questions employees have, streamline the process and help you achieve your goal of securing debts.
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