The 4 Main Types of Lien Waivers
Lien waivers are a powerful tool to help mitigate risk on your construction projects. But if you don’t understand them, you’ll experience turbulence.
What is a Lien Waiver?
If you, as a contractor or subcontractor, do any work to improve a property, you have mechanic's lien rights on that property. When exercised, these lien rights can help you get paid faster. In 2018, it took 83 days on average for contractors to get paid. This is a nine day increase compared to the 74 days it took in 2017 [Levelset]. With COVID-19 still impacting the industry at full force, a single delayed payment can spell disaster.
Lien waivers come in once you’ve been paid.
Much like a receipt from a grocery store, a lien waiver is proof that payment was exchanged for materials or work done on a project. These waivers are an easy way to help keep properties free of mechanic’s liens and limit potential lien liability.
Let’s take a look at an example. A general contractor hires an electrician to help with a project. The electrician completes $20,000 worth of work. The general contractor pays the electrician $20,000, so the electrician signs a waiver giving up lien rights on that $20,000 they were paid. No mechanic’s liens. No payment disputes. No problems.
In the United States, the following 12 states require the use of specific lien waiver forms [Constructional Financial Management Association].
In these states, a contractor must use a lien waiver that meets their state’s requirements. Otherwise, their waiver will be nullified. Although Florida is included on this list, there’s a workaround in this state: as long as both parties agree, they can use a non-statutory form.
What are the 4 Types of Lien Waivers?
Partial Conditional - This type of lien waiver is the most common. It’s used during a project and should be signed with each application for payment, including the first payment. “Partial” indicates that work is still in progress, and “conditional” means the waiver goes into effect once the payment is made.
Partial Unconditional - This less-common type of waiver is similar to the above, with one major difference. The “unconditional” portion means that this waiver is effective as soon as you sign it. Use extreme caution with unconditional waivers, since lien rights are waived immediately. You should never sign an unconditional waiver unless payment is already sitting in your bank account.
Final Conditional - Final waivers are used at the end of a project, indicating that the work is complete and the project is finalized. Much like a partial conditional waiver, the final conditional is effective once payment is made.
Final Unconditional - You sign these forms at the completion of a project, but they go into effect as soon as you sign them. Like partial unconditional waivers, you should use these sparingly and with great judgment.
How Do You Choose What Kind of Lien Waiver to Use?
You should use conditional waivers whenever possible, as they provide the greatest benefit to all parties with the lowest risk. Unconditional waivers can be risky when payment hasn’t been secured. It’s important to only sign an unconditional waiver when the money is in your bank account, not just once you’ve received a check.
As we mentioned above, one final consideration for these essential waivers is the state you’re working in. Many states have specific requirements for wording in these waivers. So be sure to check with your state to make sure you’re using the appropriate forms.
CoFi Can Help
Lien waivers are one small part of the complex world of construction payments. You want what’s best for your construction company, and at CoFi, we do too. Learn more about how CoFi payment software can help your company here.