Getting paid in the construction industry can be a long and frustrating journey. The payment process for contractors takes an average of 83 days – one of the longest of any industry in the world. Contractors have a variety of tools available to help them reduce financial risk, improve their cash flow, and speed up payment. Lien waivers are common payment tools that provide benefits for everyone who uses them. Read on to understand what a construction lien waiver is, different types of lien waivers, and best practices.
What is a lien waiver?
A lien waiver is a document signed by the party receiving payment on a construction project. In effect, it waives the party’s right to file a lien.
A lien waiver is commonly confused with a lien release. While both relate to mechanics liens, they are used a bit differently. In general, a waiver is preventive, used before a lien is ever filed. It prevents the need for a lien. A release, on the other hand, is reactive; it’s used after a mechanics lien has already been filed. A lien release form releases the lien from the property.
There’s always an exception to any rule, and that’s especially true in construction payments. Contractors in different states or regions use different terms for the same document. Sometimes they use the same words to refer to two different documents. In California, a lien waiver (a receipt for payment) is called a “Waiver and Release.” They call a lien release (which cancels an existing lien) a “Release of Lien.” Make sense?
Doing work across states requires additional communication to make sure that everyone is talking about the same thing.
Who uses lien waivers?
Everyone in construction uses lien waivers – at least, they should! Generally, lien waivers are used by two parties that have a financial relationship, where the paying party is compensating the other for the work or materials they provide. The relationship might be between a property owner and a general contractor, a general contractor and subcontractor, or a subcontractor and supplier.
Benefits to both parties
For the paying party, such as the property owner or GC, lien waivers provide several benefits:
— They act as proof that they submitted payment.
— They prevent a lien from being filed against their property.
— They protect against double payment.
For the party receiving payment, such as a subcontractor, lien waivers also provide multiple benefits:
— They speed up the payment process, helping them get paid faster.
— They help build stronger relationships on the job site.
Types of Waivers
There are four types of lien waivers:
— A conditional lien waiver for progress payment
— A conditional lien waiver for final payment
— An unconditional lien waiver for progress payment
— An unconditional lien waiver for final payment
Why are there different types? Well, exchanging waivers can create a ransom scenario straight out of the Wild West. Each party has something that the other one wants, but neither wants to give up their leverage. The property owner wants to have the lien waiver in hand before paying. The subcontractor wants cash before handing over the lien waiver.
The conditional waiver was created to solve this dilemma.
Conditional vs. Unconditional
A conditional lien waiver waives the subcontractor’s lien rights, but only after one condition: Receipt of payment. An unconditional lien waiver is absolute. It waives the lien right no matter what.
Here’s how it generally works: A subcontractor signs a conditional lien waiver form before they receive the payment. They might send it along with an invoice or payment application. This says to the property owner, “I’ll waive my rights after I have the money in hand.”
After the property owner sends a check, the subcontractor signs an unconditional waiver and delivers it to the owner. This says, “We’re square. I won’t file a lien now.”
Progress vs. Final
Payment is generally made in one of two ways: In a single lump sum at the end of a project, or in smaller progress payments paid throughout a project. When a contractor signs a lien waiver for progress payment, also called partial payment, they waive their lien rights for the specific amount on the waiver. When a subcontractor submits a progress waiver, they protect their right to file a lien on any work that they haven’t been paid for yet.
A lien waiver for final payment is used when the property owner or GC pays the subcontractor the entire amount due in the contract. It might be a lump sum contract, where the subcontractor only receives a single payment at the end of their job, or it might be the last payment in a progress billing contract. Either way, a lien waiver for final payment signals that both parties have satisfied the contract and are paid up.
States with lien waiver requirements
In the United States, there are 12 states with laws requiring the use of specific lien waiver forms: Arizona, California, Florida, Georgia, Massachusetts, Michigan, Mississippi, Missouri, Nevada, Texas, Utah, and Wyoming.
In these states, contractors have to use a lien waiver form that meets state requirements. Using one that doesn’t meet the requirements could invalidate the waiver.
In the other 38 states, where lien waivers are not regulated, the results can be chaotic. Anyone can use their own lien waiver, and they often write them to skew the legal rights in their favor.
Making mistakes on a lien waiver can be costly. If you’re in one of the 12 states with laws regarding lien waivers, the main thing to double-check is the accuracy of the numbers. The amount on a signed lien waiver may as well be written in stone. In court, what the waiver says you received is more important than what you actually received.
If you’re in one of the 38 states without lien waiver laws, be cautious. Check the numbers to make sure they’re accurate and read the waiver carefully to make sure that the other party didn’t include additional language to take away more of your rights.
Lien waivers are a good thing for the construction industry, with benefits to both parties using them. However, lien waivers must be used fairly. When waivers are used the way they are intended, they can help prevent financial risk to property owners and help contractors get paid faster.