CPA, Partner - Construction Industry Leader
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Why Lien Waivers Should Not Be Taken for Granted
Lien waivers are an important component to managing risks on construction projects and, if used properly, can save headaches and lost profits. Unfortunately, project owners are typically focused on construction scheduling and costs, often overlooking or discounting the essential component of managing risks associated with contractors and supplier claims. Lien waivers are a bedrock component to managing those risks.
As any owner or contractor who has had a significant lien claim adversely affect their company’s or project’s portfolio of financial resources can tell you, lien waivers are a minefield of mistakes waiting to happen. From imprecise dates to missing signatures to incorrect language, there are myriad ways that a lien waiver can go from being a useful tool that protects you to one that may cost you millions. The negative publicity that can come from such claims may create even more long-term damage.
Real-world examples of how lien waivers can wreak havoc on your construction project
Below are just a few of examples of how faulty lien waivers can cost your finances and your reputation.
General Contractor Fraud Resulting in Non-Payment
A large REIT approached the end of a construction project. The building was commissioned 100% complete and all retention withheld was released. Afterwards, a large subcontractor involved in the project placed a lien on the building for lack of payment. Once the owner REIT was notified that there was a lien on the building, the general contractor was unable to be located. Follow-up audits determined that lien waivers were not requested from the subcontractors, only the general contractor who committed the fraud and was accepting payment from the owner REIT, but not passing payment along to the subcontractors.
Fraudulent Lien Waiver Resulting in Doubled Costs for Supplies
A general contractor had received signed lien waiver forms from a subcontractor, apparently indicating that the steel supplier had been paid. The steel supplier filed a lien on the project. Upon audit, the lien waivers received by the general contractor were fraudulent. The contractor ended up paying for the steel a second time. While he had a criminal action against the subcontractor, the eventual recovery, net of legal fees, was nominal. Even when lien releases are received, owners and contractors must be vigilant following up and listening to grumblings at the project site.
History of Liens Resulting in Reputational Crises
The NY Subcontractors Trade Organization posts a listing related to NY City lien waivers. This list highlights the owners and projects being liened and the responsible contractor. While an oversight is possible, this is NOT a list an owner wants his project highlighted on. Those projects and contractors that regularly appear on this listing will certainly have a difficult time obtaining best prices and best subcontractors.
The largest benefits of properly-executed lien waivers include:
Protection of Owners and Contractors
Developers want to complete construction projects with the property free of mechanic’s liens and bond claims in the event vendors are not paid. These liens and claims can affect title and successful completion of the project. Utilizing proper waiver of lien forms to ensure complete payments have been made throughout the life of the project protects the owners, general contractors, subcontractors and suppliers. The proper waiver of liens is particularly important for subcontractors who can ensure they receive proper payments before the need to place a lien on the building or pursue costly legal remedies for resolution. Regular use of conditional lien waiver forms by subcontractors when submitting bills can also retard sluggish payment. For all parties, not using proper waiver of lien forms creates unnecessary risk, which may generate costly adverse effects that aren’t discovered until it’s too late.
Reduction in Potential Fraud
The unnecessary risk created by not using waiver of lien forms may lead to fraud. The lien waiver forms help mitigate risk and exposure by ensuring that controls are in place to verify payments have been made and that no person or entity involved in the project has carte blanche to control the payment process.
Avoiding Lien Waiver Dangers
When working with lien waivers, there are many things that you should take into consideration to avoid mistakes and avert fraud. Details such as period of performance, waived dollar amount, authorized signature, and related notarizations should be vouched against AIA submittals and contractual agreements. The type of waiver also should be assessed, as typically both interim and final waiver forms are submitted on projects - those waivers may be conditional or unconditional. In making determinations as to whether waivers are missing, review project manpower records and/or daily time reports to determine which contractors are on-site during any given period. Furthermore, special attention should be paid to invoice packages for costs covering materials and other supplies for which waivers may be required where there is no on-site presence.
Additionally, company policies on lien waiver forms may vary among all the vendors that are involved in a construction project. Therefore, standard forms should be included in the primary contract as a template for all vendors involved in the delivery of the construction project. Consistent use of waiver of lien forms will mitigate risk and confusion as well as ensure proper tracking of payments. Whether notarization is legally-required varies depending on jurisdiction, but the policy to require notarization should be a company policy used throughout the construction process to create consistency and mitigate risk.
New technology is another area affecting lien waivers that needs special consideration. Software that automates draws and requisitions is changing how we process and manage payments in construction. Many times, project management software may include electronic lien waivers that involve digital keys to sign and notarize forms. Owners and General Contractors should make sure they understand how these automated processes will impact their company policies on lien waivers and issuance of payments. It is vital a critical look is taken at what’s being entered and what’s being generated when using automated software.
Paying attention to the details of lien waivers can pay-off tremendously as illustrated in the following real-world success stories where CohnReznick served as an integrity monitoring consultant.
| Lien Waver Concern | CohnReznick Solution |
|---|---|
| A prime contractor interpreted the project contract requirements for lien waiver submission very narrowly and only provided lien waivers for “traditional” subcontractors. Lien waivers were not obtained from subcontractors that provided general conditions services, that were paid on a unit cost basis or did not have a defined scope of work. | CohnReznick brought this to the project owner’s attention and in consultation with the owner’s legal team the prime contractor was instructed to provide the additional waivers. |
| A prime contractor had a contract with a related subcontractor. The prime considered this work “self-performed” and thus did not request lien waivers from his subcontractor. The project owner; however, protected himself by requiring lien waivers for each entity that had a contract with the prime. | CohnReznick noted this discrepancy in reviewing the payment application submissions and lien waivers were thereafter submitted by the said subcontractor. |
| An owner required waivers to be submitted for contractors and suppliers for a contract(s) that exceeded a certain dollar threshold. Unbeknown to the owner, several contractors’ lien waivers were not being collected as each contractor in question had numerous individual contracts that did not exceed the threshold. When all project contracts for each contractor were taken together; the threshold was exceeded. | CohnReznick in analyzing the contract framework recognized this issue, brought it to the owner’s and general contractor’s attention and resolved the situation. Lien waivers were subsequently submitted as required. |
Vigilance is Key in Mitigating and Avoiding Lien Waiver Mistakes and Fraud
Because lien waivers are exchanged so routinely on construction projects, and are so closely tied to payment, it is important not to take lien waivers for granted. The key to mitigating risks associated with lien waivers is to be vigilant with each waiver to ensure it is consistent and correct. Monitoring measures that test for completeness, and accuracy can provide peace of mind. By never taking lien waivers for granted, you are certain to lessen the chances of fraud and loss on your construction project.
Gain Insight
For more information on best practices when using lien waivers, contact:
Carolyn Newcomb
Senior Manager
Ron Frazier
Senior Manager
This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
Frank Banda
CPA, CFE, PMP, Managing Partner – Government and Public Sector Advisory
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