What is a Lien Waiver? A Beginner’s Guide
In the construction industry, lien waivers are one of many documents used in the billing/payment process. Most of the time, when a contractor, subcontractor, or material supplier expects to get paid, they must submit a lien waiver. While this seems like a simple part of the payment process that allows workers to get paid, it can quickly cause complications and often covers much more than a single pay app. Everyone working on a construction project needs to get paid for labor and services. Yet, it's also important to have protection against issues that could arise in the future. Learn more about exactly what lien waivers are and how they're used. This is to ensure you're not signing away more rights than you think you are.
What is a Lien Waiver?
In its simplest form, a lien waiver is a document used to release a lien on a property when a contractor or supplier is paid for services or goods that have been rendered.
In the U.S., construction companies and material suppliers have the right to place a lien on the property they work on or supply materials to. Lien waiver laws vary from state to state and changes in these laws must be observed to maintain your rights. These liens are attached to the title of the property and must be paid off before the property can be sold. By having a lien, construction companies have a way to enforce payment for labor completed on the property. Lien waivers act as a receipt of payment when work has been completed. When workers and suppliers are paid, they no longer need a lien on the property.
In most industries, receipts and payments are exchanged at the same time. Unfortunately, lien waivers for a construction project aren't quite that simple. A lien waiver is one of many documents provided with a paid app. This means contractors, subs, and suppliers are often required to sign lien waivers before they get paid. Additionally, a lien waiver usually includes more information than services rendered and the amount paid. For these reasons, construction workers need to understand exactly what is disclosed in a lien waiver before signing it.
Types of Lien Waivers
While lien waivers act as a type of receipt in the construction industry, they are not like the simple receipts you receive in a store checkout line. They're legal documents with multiple clauses designed to protect all parties involved. The two main types of lien waivers are conditional and unconditional. They're used in different situations to provide proof of payment or to request payment.
Conditional Lien Waivers
Lien waivers are often required before payments are made. Conditional lien waivers are the most common type used in construction. A conditional lien waiver uses language that states the lien will be lifted upon the condition that payment is received. Contractors and subcontractors assume less risk when signing a conditional waiver. If you don't receive payment or the check doesn't clear, your lien rights remain in place.
Two basic types of conditional lien waivers exist. They're referred to as partial conditional lien waivers or final conditional waivers. A partial conditional waiver is used when you're expecting a progress payment on an ongoing project. The document states the amount you'll be paid and the amount of work you've completed (or work completed through a specific date) for the payment. Signing a partial conditional lien waiver means you can't file a lien for the designated part of the project but doesn't waive your right to all liens on the property. A final conditional waiver is used to collect the final payment when the project is complete. This document waives your right to file a lien on the property once the payment has been received.
Unconditional Lien Waivers
When lien waivers are signed after the payment is received, unconditional lien waivers are typically used. Unconditional lien waivers are effective as soon as the ink is dry, so it's important not to sign one unless you've already been paid. Unconditional lien waivers use language that states a payment has already been made and your signature is used as an agreement that you no longer have the right to file a lien.
Like conditional waivers, unconditional lien waivers can be partial or final waivers. A partial unconditional lien waiver is used to waive lien rights for a specific portion of work that you've already been paid for. Final conditional lien waivers are only used in the event you've been paid for all work on a completed project. A final unconditional lien waiver eliminates your right to file any liens on the property.
4 Things to Watch for When Signing a Lien Waiver
Since signing a lien waiver requires you to give up rights that protect your income, it's essential to make sure you know exactly what you're signing away. While lien waivers might be referred to as proof of payment, or conditional, the language within the document actually determines what you're agreeing to. Here's what you should know about your lien waiver before you sign.
- Is it conditional or unconditional? It's important not to sign an unconditional waiver unless you've already been paid (and the check has cleared the bank) the agreed-upon amount.
- How much money is involved? Verify that the amount stated in the document matches your expected payment and doesn't include other payments (like those for work not yet completed or unpaid retention) that will be paid later during the project.
- What dates are listed? Partial lien waivers are used to cover payments up to a certain date within the project. Make sure the dates on the document match the dates billed or the date of payment.
- Are there added clauses in the document? The language within a lien waiver can be used to add extra responsibilities or even void breach-of-contract rights. If you don't understand the terms of your lien waiver, make sure they're fully explained before you sign.
While liens and lien waivers are used to protect all parties involved in long-term construction projects, the complicated language or terms can deprive you of certain rights. Using standardized documents and a simplified billing process can help. Lien Waivers are a complicated, but necessary part of construction billing. Make the process easier when you use Flashtract's pay app software, designed just for the construction industry.