Any way that you cut it, lien waivers are an essential gear in the construction machine. They help keep the vehicle moving towards its destination and promote an atmosphere of fair play. They also pop up at several points and from several angles throughout the life of a project, so they require some special attention to handle them correctly.
But, what are lien waivers? How do they work, and what do they do? Who needs to be familiar with them? How do you manage them?
Those are great questions. This guide aims to answer all those questions and more. Having a solid lien waiver-centric foundation can make a big difference in protecting your business, project, client, or reputation.
What is a lien waiver?
If you don’t have much experience with lien waivers, you’ll need a bit of a primer to understand what they are. A lien waiver is a form exchanged during the payment process on a construction project. This form states that the owner will pay a certain amount of money for work performed on the job. In return, the form states that the subcontractor waives their rights to a lien in the amount specified.
If that sounds complicated, here is an easier way to understand lien waivers: consider them a receipt. It’s a document that proves a subcontractor received payment for the part in a project. Because the sub received payment, they agree that they will not file a lien against the property.
Lien waivers are like going to a shop. You paid for the goods, so you expect to have a receipt to show the loss prevention clerk at the door. Without that receipt, you could find yourself in hot water even if you paid full price for the goods.
The Trouble With Lien Waivers
For such a simple “I pay you, you don’t sue me” premise, lien waivers can be very tricky. This might seem hard to believe, but subcontractors don’t line up to give away their lien rights. Likewise, owners don’t enjoy paying people before they know they won’t turn on them. It’s dicey territory to navigate.
Before most subcontractors will sign a lien waiver, they want the money in the bank. Before most owners and general contractors will cut a check, they want a lien waiver. Someone has to take the first step in good faith.
The truth is that lien waivers can actually help speed up the payment process and keep things on an even keel. The trick is to find the right balance between risk and reward. Using the correct type of lien waiver can help.
Types of Lien Waivers
As with anything construction related, one form of a document is never enough. Instead, lien waivers come in two main forms (conditional and unconditional) with two subtypes (partial and final).
Conditional Lien Waivers
Conditional lien waivers are the least risky lien waiver for subcontractors, making them easier for an owner or general contractor to get a sub to sign. A conditional waiver states that a subcontractor will waive their right to file a lien for the amount set for in the lien waiver only once the general contractor or owner issues payment.
Conditional lien waivers go into effect once the subcontractor gets paid. If they don’t receive payment, they still have lien rights. It’s a fair way to make sure that everyone gets what they deserve. The subcontractor gets paid, and the owner receives a project free of liens.
Unconditional Lien Waivers
Unconditional lien waivers are much riskier for subs and can be difficult to get them to sign. Unlike conditional lien waivers, unconditional lien waivers go into effect the moment the subcontractor signs them. This means that the subcontractor gives up their right to the amount specified in the lien waiver immediately, whether or not they received payment.
Unconditional lien waivers are great for owners as they’re property receives lien protection regardless of what payment issues might arise. If a subcontractor signs an unconditional waiver and then has a problem getting their payment from the general contractor, it’s no longer the owner’s problem. This can quickly become an unfair environment for doing business, so it’s not the recommended waiver form.
Subtypes: Partial and Final
Both conditional and unconditional lien waivers break down into two subtypes: partial lien waivers and final lien waivers. They’re fairly self-descriptive, but for clarity’s sake, let’s address them.
Partial Payment Lien Waivers
Throughout the course of the project, progress payments will come due and subcontractors will submit payment applications. These payment requests will include set amounts that the sub is expecting. The owners may require a conditional or unconditional lien waiver before paying that amount, protecting them from liens in the amount specified by the payment app.
Partial lien waivers can be a bit tricky for subs when retainage or change orders are part of the equation. In the spirit of good business, owners and general contractors can include an area for exclusions within the partial lien waiver. Otherwise, subcontractors could waive their right to lien — accidentally as it may be — to the progress payment’s portion of the retainage.
Final Payment Lien Waivers
As a project comes to a close, subs will start lining up for their slice of the pie. Owners and general contractors can request conditional or unconditional final payment lien waivers in order to cut checks.
Final lien waivers include everything unless otherwise noted on the lien waiver. Again, this is an opportunity for a sub to note that the lien waiver doesn’t apply to retainage or change orders. Owners will have an easier time getting these forms signed if they provide an exclusion section where the sub can note this.
Who should be concerned with lien waivers?
There are several parties on a project that can be involved in the lien waiver process. The following are some typical roles that deal with lien waivers regularly.
When a subcontractor signs a lien waiver, they’re giving up almost all of their leverage. That means there’s a lot at stake when it comes to lien waivers for the subcontractors. Subcontractors need to pay close attention to the language in any lien waiver they sign. Also, if a lien waiver is a requirement on a project, the subcontractor should know ahead of time so they can include one with their payment application to speed things up.
The Materials Supplier
They don’t get a lot of mention, but materials suppliers have as much at stake as contractors when it comes to payments. If a project requires lien waivers from subcontractors, materials suppliers will likely have to supply them as well. The same rules apply when it comes to lien waiver language: suppliers should look them over carefully and include them with an invoice if they’re a requirement.
The General Contractor
Among many of the headaches that general contractors deal with, collecting lien waivers falls right in the middle. On most projects, the act of collecting lien waivers from every party involved falls on the general contractor. They’ll have to get lien waivers from their subs, their subs’ subs, their subs’ subs’ materials suppliers, and so on. It’s the general contractor’s job to know who’s working on the project and to ensure they receive a lien waiver from everyone.
The Office Staff
As mentioned earlier, lien waivers can flow continuously during the life of a construction project. Materials suppliers might include them with every invoice. Subcontractors will submit them with their progress payment applications. General contractors can walk into a construction trailer with an armful towards the end of any project.
Most of the management involved in lien waivers falls on the office staff. Copying, uploading, and filing a project’s lien waivers can take hours. Factor in the time spent making sure that every contractor sent theirs, and it can take up a lot of staff-hours to organize lien waivers.
The Property Owner
When it comes to lien waivers, there’s some irony involved with property owners. The lien waiver is an instrument that protects the property, yet the property owners are usually the least involved.
While there is the “that’s why I hired a general contractor” argument, owners should still concern themselves with lien waivers. Ensuring that the general contractor has a system in place to account for and collect lien waivers is essential. And, anytime payment requests make their way to the owner’s desk, they should be locking in on receiving lien waivers.
Comparing requested amounts to the waivers received will help ensure no one misses their payment and files a lien against the property.
Managing Lien Waivers with Construction Software
It’s quite obvious that there are many parties involved in a construction project that need to deal with lien waivers in one way or another. Managing all that paperwork can be daunting and can cost a firm quite a bit of time and money in the meantime. Premier Construction Software can be the key to managing your waivers effectively.
Automatic Lien Waivers
Using a construction software program to track and generate your lien waivers can make a huge difference. You’ll be able to send and receive lien waivers in real-time, and best yet, automatically.
When you generate a check with Premier’s Print Check option, the system will automatically generate a lien waiver. The waiver will be pre-populated with the correct information for the payee, the payment amount, and the language you set ahead of time.
At this point, you can send your lien waivers electronically through email to receive instant authorization or print them to distribute with paper checks.
In most cases, there are no regulations requiring specific forms or languages for lien waivers. Because this incredibly important document is mostly unregulated, many companies create lien waiver forms on the spot. This from-the-hip waiver generation can lead to inconsistency in your AP forms and systems.
When you generate a lien waiver with Premier Construction Software, you’ll have a consistent, tried-and-true form that you can replicate time and time again. Even if you’d prefer to hire a construction lawyer to draw up lien waiver language that’s both rock-solid and fair, you’ll only have to do it once.
Knowing what your lien waiver states without having to dig each individual form out of a filing cabinet can help straighten out murky situations before they become a problem.
Tracking Lien Waivers
Whether you’re a general contractor, office manager, or property owner, you need to keep all of your compliance data in one place. Referencing one program for budgets, change orders, and lien waivers ensures that you won’t miss anything.
Construction management software can track your lien waivers to show you which waivers received authorization, who signed them, and when. With a few clicks, you can check to see if any lien waivers or other compliance documents are missing so you can take action.
Remove Human Error
Any process with as many moving parts as lien waivers is susceptible to costly human-generated errors. Instead of leaning on your office staff with data entry and filing the lien waivers across several projects, you can take the burden off of them with Premier Construction Software.
Not only does Premier make lien waivers a more efficient process with alerts for missing compliance documents, but it can also help handle other accounts payable processes. Creating and sending invoices, automatic holdback and retainage release, and generally faster billing processes make Premier an invaluable tool for your firm.
Lien waivers are essential, but they can be a bit complicated to handle. With the sheer number of waivers involved in a project, ensuring that everyone is on the same page can be challenging, to say the least.
Moving your accounts payable process over to a reliable and feature-rich construction software programs will help you streamline your lien waivers process. You’ll be able to generate, send, receive, and track your waivers with far less effort. You or your staff will be able to shift time and energy to other tasks while ensuring everyone gets paid and no one needs to file a lien.
For more information on how you can manage your lien waivers with Premier Construction Software, you can schedule a personalized product demonstration here.
Tom Scalisi has over 15 years of experience working in the trades. Since moving to full-time freelance writing, he has developed a passion for helping construction companies grow. He enjoys teaching contractors how technology can streamline their businesses and educating them about their rights during payment disputes.