Lien waivers are an integral part of construction projects in general, and good credit management in particular.

Nearly every party furnishing labor or materials has the right to file a mechanics lien in the event of nonpayment, and the top-of-the-chain parties like the property owner and the GC are generally eager to obtain waivers to ensure the property does not become encumbered. Since a mechanics lien encumbrance can create numerous difficulties for these top-of-chain parties, they are highly motivated to finish the without any liens or bond claims being filed.

Keeping a project free of lien claims can be quite challenging since many construction projects involve a high volume of parties, both known and unknown to the parties ultimately in charge of payment. These visibility problems make it nearly impossible for those at the top of the contracting chain to know for certain that everyone down the chain is getting paid, which, in turn, prompts the paying parties to require lien waivers all the way down the chain.

A lien waiver is a document from a party on a construction project in which the party states that he or she has received payment and waives any future lien rights to the property (to the extent that he or she has been paid).

As lien waivers are supposed to work, a lien waiver functions as a receipt of payment — a party is paid a certain amount and waives the right to later claim a lien for that particular amount. This, however, is not always how it works, and the lien waiver process can be complicated, and full of risks — for each party.

Lien waiver types made easy

Lien waivers can be broken down into two distinct classifications, each with two distinct subtypes. Some states classify their statutory lien waiver forms by these types, but most states do not regulate the specific text of lien waivers, such that a determination of the actual type requires a close examination of the specific waiver at issue.

Every lien waiver will either be 1) a conditional waiver or 2) an unconditional waiver. Each conditional or unconditional waiver may be based on either 1) partial payment or 2) final payment.

Conditional waivers perform exactly as their name suggests: they waive the signor's lien rights, conditioned upon the occurrence of something else (generally the actual receipt of payment). This type of waiver can be used to solve the frustrating standoff in which the paying party wants a lien waiver before handing over payment, and the receiving party wants payment before handing over the lien waiver.

The conditional waiver can be signed and given to the paying party, and it becomes effective only when the payment is received. Also, as made clear by the name, this type of waiver can be used both for partial (progress) payments and for full (final) payments.

Juxtaposed to conditional waivers are unconditional waivers. This type of waiver, whether based on a partial or final payment, is much more dangerous to subcontractors and suppliers than the conditional type. Unlike conditional waivers, these unconditional waivers are completely effective and enforceable upon execution. There is no waiting for payment.

Waiver problems

Given the high stakes at issue, and the relative free-for-all in the lien waiver landscape, it's no surprise that lien waiver mismanagement or other problems are all too prevalent. And these are not just small troubles. These can be big problems with significant consequences for all of the parties involved.

The following breakdown will outline some of the most common problems involved with the lien waiver process.

Poor/incorrect forms

One often-encountered problem is that parties are using lien waiver documents that are either poorly drafted or just flat-out incorrect.

While the number of states that have statutorily mandated forms is small, some states that do have such requirements also have large construction economies. In these states, the failure to use the proper form can (and almost assuredly will) result in the entire lien waiver being invalid.

Despite this, many companies blindly use the same generic waiver form from state-to-state and project-to-project. This is a mistake.

Waiving additional rights

Lower-tiered companies are generally under at least some pressure to sign lien waivers in order to secure payment. Both this problem and the problem discussed immediately below are generated at least partially by this pressure.

The paying parties at the top of the chain have the ability to exert pressure on the lower-tiered parties by virtue of the fact that the higher-tiered parties are holding the money. Because of this pressure, the need for lower-tiered companies to get paid, and the "routine" nature of the lien waiver/payment process, companies often sign waivers without a thorough examination of the document itself.

This can lead to companies signing away more than just the lien rights associated with a particular payment. In some cases, the waiver can be for additional lien rights, but this can also extend to waiving other potential remedies or rights.

Pressure to sign prior to payment

Related to the above, companies may be pressured to sign a waiver on the "promise" of payment, rather than in exchange for the payment itself. This exchange of a waiver prior to actual payment may be fine if the waiver is a conditional waiver, but if the waiver is unconditional, the pressure to sign may result in a loss of all rights.

Technology to the rescue

With the advent of certain construction technology platforms, proper lien waiver management can be streamlined and optimized. Just like most other aspects of the construction industry, managing the lien waiver and payment process can be complicated, and this is compounded by the potential pitfalls discussed above.

The use of technology, however, allows construction finance managers to focus on the things they need to focus on, rather than the minutiae of lien waiver requirements.

Technology platforms are able to know each instance in which a specific lien waiver form is required by law, and make that form available. This means no more worry whether a lien waiver form will be determined invalid in any proceeding.

Further, by using a disinterested third-party technology platform for waiver generation, all interested parties can rest assured knowing that there is no "funny business," additional waiver language or an odd nonrequired clause clogging up the waiver form itself.

Because of these new technological abilities, the waiver process can be optimized for the benefit of each party to the transaction and allow parties to get paid, while still protecting the top-of-chain parties from the risk of liens on work for which they've already paid.