What’s lienable and what isn’t in construction credit?

Construction credit is a highly volatile business, in which risk is contingent on the project’s progress and outcomes. Cash flows down the “ladder of supply,” a tiered structure that determines when each stakeholder receives payment. With suppliers at the lowest tier, credit professionals are typically the last to obtain funds.

To secure payment for work performed, contractors, subcontractors, laborers, suppliers and, in many states, design professionals, may file a mechanic’s lien, or a legal claim against the improved property. By doing so, they enact legal recourse to claim unpaid debts through a security interest on the property improved. 

Why it matters: Not everybody understands exactly what is and isn’t lienable on a project. This lack of understanding can impede a creditor’s ability to secure lien rights. 

Lien laws vary by state, making it critical to understand local regulations for proper lien filing and enforcement. Lien rights apply to private projects, specifically for an improvement—any permanent modification, repair or enhancement made to real property that increases its value. Lienable work includes labor, materials and services such as landscaping, plumbing and architectural design.

Lien rights generally do not apply to government or public projects because public property cannot be encumbered. Instead, payment protections are typically provided through payment bonds required under the Miller Act for federal projects and similar “Little Miller Acts” at the state level.  

In many states, lien rights depend on how closely a party is connected to the project’s contracting chain. Suppliers that provide materials directly to a general contractor (GC) or a subcontractor typically qualify for lien protection. However, companies further removed from the project, such as those selling through distributors or engaging in supplier-to-supplier transactions, may face limitations depending on the state’s lien statutes.

If deadlines or procedural steps are missed, you can lose your security interest in the property. “Sending a required preliminary notice, such as a Notice of Furnishing, to the wrong party will most certainly disqualify you from obtaining lien rights,” said Christina Hartman, CBA, regional credit manager at Foundation Building Materials, LLC (Covington, KY).  

Staying compliant includes managing notice, lien, bond claim, foreclosure and suit against bond time frames. “Tracking key dates such as preliminary notices, notices of intent to lien and lien filing deadlines is critical to preserving your lien rights,” said Hartman. “We have a few resources to keep us on track, including the Deadline Tracking tool courtesy of NACM’s Secured Transaction Services (STS). If we’re ever concerned about anything, we reach out to our construction lawyers.”

The bottom line: In construction credit, securing payment starts long before an invoice goes unpaid. Understanding what is and isn’t lienable and knowing your state’s specific requirements are not administrative details—they are the difference between having legal recourse and having none. Staying informed, organized and proactive is the strongest protection a credit professional has on any construction project.