(Published by the Idaho Business Review, May 2009) 

            Idaho law provides a statutory right to those who supply labor and material for a project to assert a claim of lien against real property for the value of their work and materials.  This lien right provides a form of security for the payment for labor and materials furnished for private construction projects.  In contrast, a bond secures payment for most public works projects.  Generally, owners finish private projects and make a final payment to for all work and materials on the project.  In these unstable economic times, within a few months they sometimes receive notification that a claim of lien has been asserted against the property.  

            Often, general contractors and owners are surprised by such liens because to their knowledge, all subcontractors and suppliers have been paid in full.  Such liens usually result from a "downstream" failure by a subcontractor to timely pay for labor or materials for the project.  Rarely malicious, such failures usually result from a liquidity crisis or outright insolvency.  As the overdue bills pile up, a financially strapped subcontractor may be tempted to use the proceeds from one project to pay unrelated bills.  This can lead to a frustrating scenario in which final payment has been made on a project, but additional sums are required to release a lien against the property.  Beyond the additional expense, resolving a mechanic's lien can prove a hassle that can adversely affect financing or a pending sale.  

            There are a number of measures that contractors and owners can take to minimize their project risks, including the potential of construction liens on their projects.  This plan should include an investigation prior to contracting, on-going risk management during the project and consideration of risk allocation strategies.   

  Pre-Contract Investigation 

             Upfront due diligence into the reputation and financial condition of those with whom you may contract can minimize the risk of future problems.  Owners need to investigate the financial condition of general contractors.  General contractors need to evaluate owners, subcontractors and suppliers.  Owners and contractors often have a core group of businesses that they worked with on past projects and trust.  However, many once reliable and viable owners, developers, contractors and subcontractors have failed during the last year and a half.  In these times, you should not rely on a business's prior reputation, even a sterling one.  Before using any contractor, confirm that they are registered with the Idaho Contractors Board by contacting the Idaho Bureau of Occupational Licenses.  Confirm that contractors carry liability insurance and workers compensation coverage.  Ask entities you may contract with for references and follow up on these references.  Talk with your contacts within the construction industry.  While a developer or contractor might claim financial stability, if they are actually struggling financially, others in the industry probably know.

On-Going Risk Management During Projects 

            Beyond pre-contract vetting of parties by reputation and financial stability, you should remain attuned throughout projects to any indication that an entity may be struggling financially. 

            Also, owners and contractors should consider affirmative measures to insure that progress payments are applied toward the labor and materials for their project.  Contractors should consider issuing joint checks that name both the subcontractor and their material supplier.  Likewise, owners should consider requiring partial lien waivers from subcontractors and suppliers.  

            However, a partial lien waiver only covers work performed or materials supplied through the date reflected in the waiver.  Occasionally, owners believe they are protected by a lien waiver, only to discover a lien for labor or materials delivered after the date of the partial waiver.  Likewise, a partial lien waiver only covers the entity waiving its lien rights.  For example, a plumber runs into financial problems during a project and the contractor replaces the plumber midway through a job.  A lien waiver from the first plumber does not prevent the second plumber from filing a lien.  Likewise, a partial lien waiver from a material supplier for materials ordered by the first plumber does not waive the supplier's lien rights for materials supplied to the second plumber. 

            Prior to making a final payment on a project, owners may want to request a list of all subcontractors, material suppliers, and rental equipment providers hired by the contractor for the project.  This information can be used to obtain lien waivers from everyone hired for the project at the time of final payment.  Of course, requiring lien waivers can add some administrative hassles to a project, but requiring lien waivers provides an assurance that the payments will be applied toward the work and materials for the project. 

            Project Risk Allocation

           Where appropriate, you should consider the allocation of risk on projects.  For example, a title company can manage the disbursement of construction draws and take care of obtaining lien waivers.  Owners should also consider purchasing an extended policy of title insurance.  For an owner, this can reallocate much of the risk related to non-payment of subcontractors and material suppliers.  With a payment bond, the risk of a contractor's non-payment of subcontractors and material suppliers can be shifted to a surety.  Likewise, a performance bond insures that a project will be completed.  

            While there is no way to completely eliminate risk from projects, but contractors and owners can significantly minimize their risk and the potential for lien claims on projects.  Given the recent turmoil in the construction industry, the days of doing business based upon a handshake may be over.  A heightened level of due diligence has become a smart business practice.