Even though lien waivers are quite common, contractors, suppliers, and developers alike may not fully understand how they work and why they are necessary.
Lien waivers benefit all parties involved in a construction project but can be complicated, and if not done correctly, can result in a massive loss of funds.
In this article, we’ll look at the following topics that will give you a working knowledge of lien waivers:
- What is a lien waiver in construction
- How is a lien waiver used
- What types of lien waivers are available
Flexbase: Automated Invoicing and Lien Waivers Is One Part of Our Cash Flow Management Solution
Flexbase is your one-stop shop construction billing solution. Our platform helps companies manage cash flow and automate their compliance forms and other types of paperwork.
In addition to auto-generating payment requests, Flexbase offers solutions including:
- Generation of compliance and other forms like:
- Schedule of values
- Lien waivers
- Prevailing wage
- Insurance documents
There are no subscriptions or licenses, and Flexbase is incredibly easy to use.
And since you only pay when you receive money, it’s essentially free to use.
Fees start as low as 0.5% per payout received, so users experience lower fees for higher payment volume.
What is a Lien Waiver?
A lien waiver is a document that acts as a sort of receipt for payment in the construction industry.
It is a written agreement where the signer waives the right to file a lien for the specified amount in the waiver.
Lien waivers can be initiated by a:
- Subcontractor; or
When signed by the other party, the lien waiver essentially states that the initiator of the waiver has been fully paid. This, in turn, waives their rights to file a lien.
Who Needs Lien Waivers?
If you’re involved in construction and will be requesting payment for materials supplied or services rendered, you need a lien waiver.
Usually, the General Contractor will request lien waivers from anyone involved in the project as they are paid. This includes:
- Material suppliers
- Equipment rental companies; and
- Anyone else who may provide a service.
Avoiding liens benefits everyone involved, and since most GCs prefer to get the job done without the filing of any liens, lien waivers can save them a lot of headaches, time, and money.
Why Should You Send a Lien Waiver?
In every construction job, there are two parties involved:
- The payor (the one making payments); and
- The payee (the one receiving the payments).
The payor (the property owner or GC) is the one who sends a lien waiver to the payee (the subcontractor or materials supplier), who signs the waiver, agreeing not to file a lien on the specified amount.
Lien waivers benefit both the one who is paying and the one receiving the payment.
Lien waivers benefit the party making payment by:
- Acting as proof of payment submitted
- Preventing a lien from being filed against their property or company
- Protecting against double payment for a single service
Lien waivers benefit the party receiving payment by:
- Speeding up the payment process so payments can be received quicker
- Helping build stronger work relationships on the job site
To fully understand the lien waiver process and the benefits to both parties, an example may be helpful.
Let’s say a GC pays a mechanical subcontractor $50,000 for installing all the plumbing and HVAC on a project and sends a lien waiver for the subcontractor to sign. When the subcontractor signs the waiver, he waives a lien worth $50,000.
By requesting and signing this lien waiver, the GC is protected from a lien being filed against him.
Furthermore, the subcontractor benefits by having added assurance that he will be paid for the completed job.
When is a Lien Waiver Needed?
Though lien waivers are generally not required, they are most certainly a necessity for those who are making payments — and this is especially true for progress payments.
Any time a progress payment is made, a lien waiver should go along with it.
Of course, you can write your own lien waiver by hand, but if you make mistakes in the wording or forget to include something, it can cause all kinds of problems.
People in the construction industry are human, and many are looking for any reason to not pay what they owe — especially on sizable projects. So, if there is even one tiny error in the lien waiver, that will give them the excuse they are looking for to avoid payment.
Not sure what to include in a lien waiver or how to execute it?
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Are Lien Waivers Required In Every State?
Lien waivers are not required anywhere but are common everywhere.
In general, lien waivers should be used by any construction company or contractor that makes payment requests.
And even though lien waivers are not required by law in any of the United States, 12 states have mandatory forms that need to be used.
Lien waivers can be quite confusing, so requiring mandatory forms in these states makes it easy for contractors and owners to know they are using the correct forms and that they are worded properly.
If you work on a construction project in one of the following states, you will need to make sure you use the mandatory lien waiver forms:
Do Lien Waivers Need to be Notarized?
In most cases, lien waivers do not need to be notarized — unless it is being used as an affidavit or needs to be filed with a county recorder.
A notarized document simply verifies a signature. It doesn’t prove the truth or clarify anything (other than the identity of the person signing), so notarizing lien waivers is fairly uncommon.
But there are a few states where notarized lien waivers are required.
Lien waivers must be notarized to be considered valid and enforceable in:
When Should You Sign a Lien Waiver?
It may go without saying, but a lien waiver is signed before a lien is filed.
The party requesting the lien waiver should send it to the other party unsigned. Usually, the party receiving the lien waiver will sign it when payment is made.
However, in some cases, the payor (owner or GC) may ask for the payee (a subcontractor) to sign a lien waiver before payment is paid out.
Of course, this protects the GC from a lien being filed on the project, but it may not benefit the subcontractor in the same way since he would be releasing his rights before the payment is processed and cleared.
What Are The Different Types of Lien Waivers?
There are two basic types of lien waivers:
- Conditional lien waivers
- Unconditional lien waivers
Each of these types has 2 subsets:
- For progress payment
- For final payment
So, essentially, there are 4 types of waivers:
- Conditional waiver for progress payment
- Conditional waiver for final payment
- Unconditional waiver for progress payment
- Unconditional waiver for final payment
Most states in the U.S. do not regulate lien waivers at all, but there are a few states that do.
Many of these states only acknowledge conditional waivers on progress payments and unconditional waivers on final payments.
Conditional Lien Waiver
As the name implies, conditional lien waivers are dependent on a condition specified in the document.
In most cases, the condition necessary for the lien waiver to come into effect is the condition of the payee’s receipt of payment.
When is a Conditional Lien Waiver Needed?
A conditional waiver might be needed anytime a payout is made. This guarantees the owner or GC that a lien won’t be filed as long as the subcontractor or supplier is paid.
But if the party who signs the waiver does not get paid, then the waiver would become invalid, giving the signor the right to file a lien.
Conditional lien waivers can be specified for both:
- Progress payments
- Final payments
A conditional waiver for progress payments waives lien rights up to a specific date as long as payments have been received. This type of waiver should be used when you are expecting to receive a specific progress payment on the project.
A conditional waiver for final payments removes lien rights when receipt of the final payment is received. Some provisions may apply. This type of waiver should be used when you are not expecting more payments in the future.
Unconditional waivers for progress payments release the lien rights through a specific date with no conditions.
This type of waiver should be used when you have received partial payment on the project, even though future payment may be expected.
This waiver should not be used if there is a chance that the payment will fail or be delayed for some reason. A conditional waiver would be the better option in this case.
Unconditional waivers for final payments remove lien rights once payment is received. This waiver should be used when all payments have been made and you are not expecting any future payments.
As with the other type of unconditional waiver, this one should only be used when the payment has been processed and is in hand.
How Do You Create a Lien Waiver?
Creating your own lien waiver is possible, but not recommended.
Mistakes in lien waivers can be costly, and while forms can be downloaded online, some states may have specific requirements like:
- Mandatory forms
- Notarization; or
- Specific legal language.
If any of these are wrong or missing, the waiver will be rendered invalid.
In addition, lien waivers should include precise language regarding specific:
- Project details
Otherwise, the signer of the waiver might try to get payments for any service or project they specify, rather than the one that should have been named in the waiver.
Paying careful attention to detail benefits both the payor and the payee.
How Flexbase Takes the Guesswork Out of Lien Waivers
Getting all the details right with lien waivers is a big deal. Even the smallest mistake or omission can cost more than you’re willing to pay.
With so much at stake, it makes sense to get help from professionals.
If you're looking for, example, lien waivers for California, then we've got you covered. If you scroll to the footer of our site, you'll see a tab called "Lien Waivers" - there, you can find lien waivers by state that you can download.
Lien waivers, if not handled properly, can also have negative impacts on your cash flow. Flexbase is solving that problem as well. We launched the first credit card for construction.
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