How contract documents prevent financial risk & enable faster payment

The mechanics lien is a powerful tool, but in everyday practice, the true value of a mechanics lien may be in waiving the right to claim one. Unlike the mechanics lien itself, waiving the right to claim a lien can work to the benefit of all parties and can be a true collaborative, relationship-building moment. Both parties get what they want in a fair exchange, and the project can continue without any hiccups. Waiving lien rights can seem like a complex and dangerous task, but it doesn't need to be that way. When the lien waiver exchange is completed in a fair manner, it is a smooth and straightforward aspect of the construction payment process that is beneficial for every participant.

The View from Above

The main objective of an owner, general contractor or other party at the top of the contracting chain is usually to obtain signed waivers from the parties below them (subcontractors and suppliers). They should also make sure those lien waivers are valid and correspond exactly with the payments that have been made. This need can be maximized by paying attention to the following best practices.

Take Advantage of Notices

One of the specific issues for parties at the top of the contracting chain is that an absence of data about project participants makes it difficult to know whether the proper lien waivers have been obtained. The lack of visibility throughout the contracting chain and complete knowledge of project participants can frustrate parties looking to obtain each required waiver and fully protect themselves against lien-based financial risk.

Construction projects can be large, complex and convoluted, and some participants may go unnoticed by parties at the top of the contracting chain. Luckily, preliminary notices were designed to correct this deficiency. Using preliminary notices for the purpose for which they were intended—and not just filing received notices away without any real review—is the mark of a smart GC or owner.

Preliminary notices provide a perfect template for creating a comprehensive view of the project. By using received notices to create a project tree of all project participants, that project tree can be used as a custom checklist of parties from whom lien waivers should be obtained. And the more parties a GC knows are on the specific project, the more comprehensive the chart of parties from whom to obtain lien waivers will be.

Waivers Should Be Tied to Each Payment

Lien waivers shouldn't be treated as something to obtain without a set schedule. In order to create a successful lien waiver policy and obtain a maximum amount of protection from potential financial risk, you must create a structured and ordered policy. Each payment should be associated with a lien waiver.

If waivers are specifically tied to the proper payments, use fair waivers templates that are specifically formulated to waive only the amounts actually associated with the payment to which they are attached, and are distributed and obtained from all the parties associated with the payment. A top-tier party can basically eliminate the risk of valid liens being filed against the project.

The View from Below

While the top of the chain is concerned with obtaining waivers and limiting lien exposure, the lower-tier parties are worried about losing more than they bargained for and being leveraged into accepting unfair documents or situations. Lien waivers are exchanged at a crucial time in the project. The exchange of a needed payment can result in an imbalance of power between the party with the money and the party that needs it. However, with that backdrop, lower-tier parties are in a position to significantly increase the speed of payments and foster goodwill with the top-tier parties by using lien waivers proactively and effectively.

Due to misunderstandings, complications, frustrating documents, inefficient exchanges and poor waiver management, lien waivers can often cause slow payment, rather than solve the slow payment problems as they could and should be.

Optimizing waiver processes can fundamentally change the speed of payments without disrupting the protection desired by each side.

Getting paid quickly, keeping the project free of lien claims and avoiding double payment all intersect at lien waivers. Realizing and taking advantage of this situation can enable savvy, lower-tier parties to get paid more quickly and alleviate cash flow problems.

This seemingly "too good to be true" solution can be accomplished through conditional waivers. Every party should send a conditional waiver (conditioned upon the actual payment) along with every invoice. A conditional waiver is a lien waiver that is only effective upon the completion of some particular condition. In this case, since the waiver is conditioned upon actual payment, it is not enforceable until such a payment occurs.

Once the payment occurs, the waiver immediately relinquishes the right to lien for that amount. This seems simple, but by proactively providing lien waivers (something very few parties are willing to consider doing), a lower-tier party shows that it is willing to be fair and remove a step from the payment process. This is a good way to build relationships, get more business and get paid faster.

Rather than being the complicated documents with a difficult process that it seems to be, lien waivers can be the simple solution to solving some construction payment problems.