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Reducing Risk: Mastering Construction Lien Waivers for Contractors

Yancy Lassiter
Published Mar 1, 2024

In one of our last articles, we talked about construction liens and how they can protect your construction business from nonpayment. Today we’re going to take a look at the other side of the coin: construction lien waivers. A pretty common document on most jobs you’ll work on, construction lien waivers are there to make sure payments received are correctly known by each party involved in a project and agreements are honored in a timely manner. Of course, like most things, they can also present plenty of risk if not managed well.

Key Takeaways

  • A construction lien waiver is a legally binding receipt of payment. By signing one, you waive your right to file a mechanic’s lien for the indicated time period.
  • Construction lien waivers are part of the payment process and can be either conditional or unconditional.
  • Before starting any project, make sure you know who’s funding it. You don’t want to waive your right to file a lien away if a check bounces or a company goes under.

What is a Construction Lien Waiver?

Construction projects are risky business, but most jobs have protective mechanisms in place in case things go south. One of the ways contractors and subcontractors can protect themselves is by requiring everyone below them in the supply chain to sign mandatory lien waiver forms.

Signing a construction lien waiver form essentially means you’re surrendering your lien rights — the legal right to file a mechanic’s lien in the future (for the specific date range you’re indicating). If you sign this document, you’re stating that you have been properly paid for your work — a bit like a receipt or proof of payment. These waivers are a typical part of the monthly payment process for construction companies. The lien waiver process usually follows two steps:

  • When you send out your payment applications, you’ll also normally send a conditional lien waiver that acts as a partial waiver for work completed to that point.
  • Once payment is received, the GC will send out a request for unconditional lien waivers along with your check (which will be remitted at the same time).
  • When the project is completed and you’re requesting final payment, you’ll sign a final waiver.

While construction lien waiver verbiage can vary (more on this later), the ultimate goal of this legal document is to finish a project lien-free. And while it may seem like these waivers error on the side of protecting the higher-ups (lenders and project owners) on a job, they actually protect everyone involved and are your leverage to ensure the payment is being made for the work completed.

Different Types of Lien Waivers

There are two main types of lien waivers you’ll encounter between a payer and payee on construction jobs, and each type has two subtypes.

The first type is called a conditional waiver:

“Conditional Waiver and Release Upon Progress Payment” – These are part of the monthly billing process. When you send in a construction payment application, you normally will also need to send in this type of conditional waiver listing the partial payment amount you put on that application.

“Conditional Waiver and Release Upon Final Payment” – You’ll send in this waiver for any retainage payment owed. Depending on the specific trade and project schedule, this might be sent earlier in the job or as your part or the job itself is wrapping up.

Next up are unconditional waivers, which flow back down the ladder as payments are received from the upstream payer:

“Unconditional Waiver and Release Upon Progress Payment” – Once a GC has all their checks ready to send out, they’ll send these out with them. This ensures an exchange is happening – you get a check, you send back an unconditional lien waiver.

“Unconditional Waiver and Release Upon Final Payment” – Same idea as above, but requests for these are sent when contractors receive their retainage payment.

When sending construction lien waivers, you may also be required to send in corresponding invoices as well for clarification.

Lien Waiver vs. Lien Release

The function of a construction lien waiver is to protect you from being subject to (or having to file) a lien claim on the property. Unfortunately, things don’t always go as expected.

Let’s say you’re a general contractor who’s gotten waivers from all of your subcontractors, indicating that you have paid every subcontractor, and they have paid everyone below them. This doesn’t automatically mean that each sub has done what they said they’d do. You wrap up a construction job thinking everything is settled, but then a lien you don’t know about is filed against the property by a materials vendor. Once you’ve spoken to them about this discrepancy, a good subcontractor should clear it up. Sometimes though, you might find yourself in a situation where a sub doesn’t want or have the ability to pay, which could be a sign that their business is in trouble.

At this point, you’ll need to have a conversation with the claimant, the material supplier, explaining that you’ve kept your end of the bargain. They may then release the lien on the property or asset. Worst case scenario though, you’ll have to pay that material supplier in order for them to sign a lien release, and figure out how to get those funds back from the contractor who should have paid them to begin with.

How to Use a Lien Waiver to Your Advantage

Both GCs and subcontractors can use lien waivers to their advantage. And of course, the most obvious advantage is that waivers force the person or company above you to pay you what you’re owed. However, construction lien waivers also come with some disadvantages. For example, if someone files a false lien on the property, it’s now your job to get that lien removed, which can end up causing payment issues for everyone. This scenario most often happens with material suppliers who confuse one property for another.

One of the biggest pieces of advice we can give is to keep your liens in place until your check actually clears. Also, if you file a lien and the person above you won’t talk to you about it, you can take it to the property owner – and get the payment you deserve. If the owner won’t talk, now it’s time to take it to the bank. Just be sure that no matter what you’re working on, you know who is ultimately funding the project.

🔎 Dive Deeper: Essentials of Construction Accounting

Final Thoughts

Construction lien waivers aren’t just a formality – they’re a powerful mechanism on any job in the construction industry. And as long as all parties manage them with care, they’ll help ensure everyone gets paid fairly for their work.

On the other side of protecting your construction business is making sure that jobs are being managed effectively. To dive deeper into that topic, check out our ultimate guide to construction project management.

Quick Links to Mechanics Lien Laws by State

Yancy Lassiter

Yancy Lassiter, a CPA with a degree from the University of Texas, has 12 years under his belt as a Controller and CFO in the construction industry; he’s your go-to guy for finance in the building industry.

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