Understanding full price vs unpaid balance mechanic’s liens

Mechanic’s lien laws are the bedrock of the construction credit field, offering credit managers protection as they await payment during long projects. As credit managers work in multiple states, they will encounter two distinct types of liens: full price liens and unpaid balance liens. While both offer protection, it is critical that credit managers understand what type of lien they are filing.

Full price liens secure money for the total amount of work that has been provided by the lien claimant. Liens are not limited to the unpaid funds between the owner and prime contractor. An unpaid balance lien secures the amount of money the property owner has not already paid to the general contractor, at the time of filing, so it is limited to the unpaid funds between the owner and general contractor.

Why it matters: While liens are equally important across all jurisdictions, the laws that shape timelines, notice requirements and payment schedules vary from state to state. In states with unpaid balance liens, the project owner is no longer liable to pay downstream subcontractors or suppliers if they’ve paid the general contractor assuming funds will be passed down, complicating the lien process.

“There is no one-size-fits-all approach to lien rights,” said David Escobar, CCE, credit and collections manager for Evapco (Taneytown, MD). “What works in Maryland wouldn’t work in Texas. The requirements, deadlines, service methods and who qualifies to file varies by state, so you need to learn the lien laws in the states you’re operating in and stay up to date on changes.”

Regardless of which type of lien a state’s law stipulates, timeliness with deadlines is critical. But states with full price lien laws offer creditors a bit more protection. “Full price liens are often the best situation for credit managers,” said Isaac Kotila, regional credit manager for Insulation Distributors (Chanhassen, MN). “They give the owner the opportunity to double pay, so as they’re issuing payments down to the general contractor, they have to be ensuring that those payments are going down to the subcontractors and suppliers, so it offers those parties the more protection. It’s ideal for us because we don’t have to worry about anything on our end based on what the owner has paid at any given point in time.”

Conversely, unpaid balance states offer more protection for owners because they will not have to double pay, or pay for the same service or supplies twice. “Unpaid balance liens still offer protection and they’re definitely better than not having lien rights or bond claims on a project,” said Kotila. “But they do have limitations. If an owner issued a payment down to the general contractor, and the general contractor holds on to that money, the owner is no longer liable for those funds. So, if the general contractor isn’t kicking funds down, it basically removes our lien rights for whatever period or funds that owner has sent down to the general contractor.”

When working in a state with unpaid balance liens, credit managers are often more careful with filing and perfecting liens as delays carry more consequences. “The timeline in those states is more tightened,” said Lisa Moran, credit and collections manager for Crescent Electric Supply Company (Bloomington, IL). “For an unpaid balance state, especially with customers you don’t do a lot of business with and haven’t developed much comfort or familiarity with, you want to work on tighter deadlines because it’s harder to predict when they’re going to pay you and there’s a lower tolerance for delinquency.”

“It’s best practice to be on top of deadlines in all situations, not just when working in an unpaid balance state,” said Jen Martin, director of credit for Carter-Jones Companies (Kent, OH). “In an unpaid balance state, as soon as I see a missed payment, I am going to look into that and try and figure out where I stand and what my rights to secure look like. Do I need to escalate this up the chain and call the next person in the chain of money flow? Overall, I am going to be really cognizant of actually talking to the other parties and figure out if they’ve been paid or not. Now all of that said, I would do the same thing in a full price state if I’m actually managing my receivables.”

In unpaid balance liens states, it is more critical that credit managers pay attention to the flow of cash within a project because losing out on lien rights is so risky. “To understand how money is moving in a project, you need to know who the players are early on,” Moran said. “If you know the parties involved, it is a lot easier to follow the flow of the money. A lot of those states there are preliminary notice requirements so the other parties going to know you’re on the job, but you just want to make sure that no funny business is going on. If somebody hasn’t waived your rights as part of their lien waiver, you want to get a hold of the appropriate parties early and make sure that you’re recognized as having a balance out there with them.”

The bottom line: While the timeline for filing liens may look different in every state, best practices for construction creditors are consistent. At the start of any construction project, credit managers should familiarize themselves with the state-specific lien laws, the important parties involved and the project timeline.

NACM Secured Transactions Services’ Lien Navigator, an authoritative guide of state lien laws, is an invaluable resource to credit managers looking to learn more about lien laws. Members can find a full guide on unpaid and full price lien states here.