Managing a construction project can be more complicated and involved than even the most prepared entrepreneur could anticipate.
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It's sort of like herding cats. If there's one thing you can do to really protect yourself financially as the construction progresses – it's getting signed lien waivers. Always get a lien waiver signed when you make a payment – then your construction project will really purr.
What is a Lien?
A mechanics' lien is a document that contractors can file in the public record and have placed on the title of a piece of real estate. Contractors file a lien when they have an unpaid claim on the project. Filing a lien allows the contractor to assert that the title to that project (whether it's a home or an office) is not free and clear because there is still money owed on it.
For instance, imagine you are building an office building and you've hired a general contractor. The general contractor, in turn, has hired over 20 subcontractors to manage the work. The plumbing subcontractor gets started, does some work, and then gets in a dispute with the general contractor. After some deliberation the general contractor fires the sub, refusing them any payment for the work they've already completed.
What recourse does the subcontractor have? They can file a mechanics' lien on the project. It may go un-noticed for a time because the general contractor ignores it. But when you go to put permanent financing on the building, you won't be able to until you get the title free and clear of liens. Someone will have to solve the dispute with the plumbing contractor.
What is a Lien Waiver?
A lien waiver, then, is a document that you get a general contractor or subcontractor to sign upon receiving payment. If you are working with a general contractor, ideally he should sign a lien waiver for each payment he has received. This document waives the contractor's right to place any liens on the building for the work they are accepting payment for. In a perfect world, the general contractor would do the same for each of his subcontractors.
Why are Lien Waiver's Important?
Lien waivers are critical because they can really slow down the financing or sale of a project. In the example above, the plumber's dispute could have been for as little as 5 or 10 thousand dollars. If you are building a $30 million dollar office building it can be really expensive to hold up the project over such a seemingly small issue.
However, if liens become a real issue, a contractor can actually make legal motions to force the sale of the property to ensure they get paid. That's serious. If you have done your work with the general contractor, however, it will become his issue to make sure everyone gets paid. You should, for safety's sake, inquire with your general contractor if he's getting lien waivers signed for every construction draw.
In addition to the financing issues and the forced sale, liens can create one other issue. Many municipalities will not give you a certificate of occupancy or a certificate of completion on your project until you can demonstrate that you have taken care of all liens on the property. This means that you cannot legally occupy the space until you have the liens removed.
So make sure you focus on lien waivers on your next construction project and protect yourself from huge costs in terms of delay and legal fees down the road. But remember, when you have a check sitting there for a contractor you have the hammer. They want that money – so get that lien waiver signed!