As a construction worker, your business stands to benefit from the expertise of a construction accounting firm. Construction accountants who know the ins and outs of the industry can make all the difference in your business’s longevity and financial prosperity.
Construction liens perfectly showcase construction’s complexity. You complete a job (rarely ever an easy or quick feat). However, your client fails to pay the balance due on time.
A lien is a legal document that prevents your client from taking over property you’ve helped build before they’ve finished their financial obligations to you. They can’t sell or refinance until you and your workers receive payment for your materials and services.
Liens put power in your hands, providing balance and security in your industry’s unique payment structure. If a client doesn’t pay, you have the legal system on your side. That power gives property owners a nudge in the right direction—pay up sooner rather than later.
Did you know a construction bookkeeping service can help you better manage your liens and bottom line? Let’s take a closer look at construction liens. You’ll discover their impact on accounting and how an accounting service might be what you need to secure your financial future in the construction industry.
The Reason for Construction Liens
As a construction worker, you make money unlike anyone in any other industry. You have substantial upfront costs in buying supplies and hiring workers. Finishing a job and getting paid for it can take a long time. You might wait even longer for the owner to approve the work and finish paying for it.
Suppose an owner withholds all or a portion of payments until completely satisfied. You can’t simply take back whatever you built and resell it.
Then, there’s the construction payment chain to remember—it takes many workers to pull off a construction project, and not everyone has direct contact with the owner. How do they get peace of mind that they’ll be paid?
Construction liens provide that peace of mind to anyone furnishing labor or materials on a construction job. Everyone can work in good faith, knowing they’ll get paid for their labor and ideas.
Lien Types
Liens are that extra motivation to promote your client’s full, prompt payment. Taking on various forms, they serve different purposes and sectors of construction jobs, like:
- The Design Team—Designers, architects, engineers, and the like may not provide physical building materials or labor. Still, their intellectual contributions remain essential to the mission. Design professional’s liens help ensure they get paid for their creative work.
- The Work Crew—Mechanic’s/construction/ material persons’ liens might be the most well-known type. Contractors, subcontractors, and suppliers can file a lien on a property if they haven’t received payment for completed jobs or the materials they provided. That property can eventually go into foreclosure or get repossessed if the client never pays what they owe.
Both you and your professional accounting firm should understand liens, their role in your accounting system, and their impact on your financial picture. Ideally, your accountant can help you also apply for and manage liens.
Paperwork and Timing
Paperwork, timing, and other legal requirements can become challenging as your construction business grows and you take on more projects. You have to think about and plan for filing preliminary notices on all your jobs.
You’ll face additional steps, paperwork, and deadlines if you have to claim and enforce a lien. And it’s even more likely that you and the property owner will participate in dispute resolutions before enforcement.
What does this mean for you? It adds challenging elements to your accounting and recordkeeping that a knowledgeable accountant can help you with.
Managing the Books
Liens tie into your financial management as a contractor. They impact accounts receivables and payables. They affect your reports and compliance. Let’s take a closer look at various accounting aspects a lien touches.
Accounts Receivable and Revenue Recognition
Filing a lien means you haven't been paid for completed work. That unpaid amount must remain an account receivable on the books until resolved. You often shouldn’t recognize it as revenue when the payment remains uncertain.
Accounts Payable and Liabilities
You could be subject to a lien—a subcontractor or supplier might place a lien on your project if you haven’t fully paid them. That becomes a liability and must be recorded, which affects your financial records and cash flow management.
Financial Statements and Cash Flow
A customer’s unpaid invoice impacts your cash flow and cash flow statements. So does a lien.
Outstanding liens can destabilize your business and creditworthiness. They show up as contingent liabilities on financial disclosures. Overall, you can end up looking less attractive to investors and lenders.
Taxes
An unpaid lien can affect your tax reporting on income and deductions. Your taxable revenue might need adjusting based on payments received.
Project Accounting and Retainage
You must adequately document and accurately track all contract terms on your jobs. Liens tend to arise from disputes over retainage (withheld payments), making quality recordkeeping essential. Payments, milestones, lien releases, and the like set the foundation for project accounting compliance.
Legal and Compliance Considerations
Prevent additional financial and legal risks—stay ahead of lien-filing deadlines, payment schedules, and releases. Proper documentation is your lifeline in times of audits and disputes.
Accounting Solutions
Proper bookkeeping is essential. It’s your lifeline during payment disputes. However, it’s challenging to do it right if you don’t have a construction accounting background. Consider hiring an accounting service near you with a background in construction accounting for accurate records, trackable progress, and reduced financial risk.
