Understanding Mechanic's Liens: Why They Matter

Mechanic’s liens can be a tricky subject to navigate. As an accountant or bookkeeper, you should understand what a mechanic’s lien is and how it can impact your client’s financial situation. 

What Are Mechanic’s Liens?

Simply put, a mechanic’s lien is a legal claim made against a property by someone who has provided labor/materials to improve it. This usually applies to construction projects, although it may also apply to other work, such as home renovations. 

Essentially, if someone has worked on a property and has not been paid for their services, they can place a lien on that property to ensure that they receive payment. 

Risks to Clients

From an accounting perspective, mechanic’s liens can pose a serious risk to your client’s financial situation. If a lien is placed on their property, it can (and likely will) impact their ability to sell or refinance the property until the lien is paid off. This can create a delay in their plans, or worse, lead to a loss in profit if they are unable to sell the property for the full value. 

Additionally, if your client indeed owes money to the contractor/supplier and fails to pay, they may also face legal action, furthering costs and delays to their project. As their accountant, you must ensure that they are aware of the risks associated with mechanic’s liens and have processes in place to protect themselves. 

Minimizing Concerns 

To minimize the risk of mechanic’s liens, verify that your client has a solid contract in place with any contractors or suppliers they work with. This contract should outline the terms of the agreement, including but not limited to:

• payment schedules 

• deadlines 

• any potential consequences for failing to meet these terms

It’s also important to ensure that your client is keeping accurate financial records and tracking expenses related to the project. This helps identify potential issues early on and allows for a swift resolution. 

As a financial professional, it’s your responsibility to help your clients stay on top of their financial situations and understand how to meet their obligations. By ensuring that they have accurate financial records, solid contracts, and steady income, you can help protect your clients from the potential financial consequences of a mechanic’s lien.