Glossary of Construction Payment Terms

There are plenty of documents, agreements, provisions, and other terms used in the language of construction and construction finance. Some terms have more than one definition, depending on who you ask, and others overlap in meaning. This Construction Payment Glossary will distill this confusing set of phrases into an easy-to-understand nomenclature, broken down by category.

CONSTRUCTION PARTIES

Top-of-Chain, or High-Tier

People and businesses that are closer to the source of money on a given project, and that typically hire other people to do work for them. On large projects, this would include, lenders, property owners, developers, and general contractors. On smaller projects, it might include homeowners and general contractors.

Bottom-of-Chain, or Low-Tier

People and businesses that are hired by others to do the actual work on a project. These parties typically are the first to do work and the last to receive payment. This group usually includes material suppliers and sub-contractors.

Risk-Shifting Mechanism

Any tactic moves financial risk from one party to another, such that if payment issues arise on a project, those bearing the risk will be the ones that are paid last (if at all).

See: Pay-When-Paid Clause, Pay-If-Paid Clause, Lien Waiver

LIEN DOCUMENTS

Required Document

A document that must be filed or sent at a time specified by law in order to preserve your right to file a lien. Some required documents must follow an exact format, whereas others only need contain certain information. One document (e.g. a Preliminary Notice) may “required” in some states but not in others. Documents that are not required are considered voluntary.

Voluntary Document

A document that is not required to preserve the right to lien, but may sent with the intent of encouraging somebody to pay you for money earned. For example, many people send voluntary Notices of Intent to Lien (NOI) as a way to prompt payment from their customers, even though they may file a lien without sending a NOI.

Mechanics Lien

Mechanics liens are the foundation of the entire lien process. This document is a statutory lien on real property that provides security to people/businesses in the construction industry who provide labor and/or materials toward the improvement of real property. Liens are official documents that must be filed with government offices (usually the county), and they do not go away until officially released or canceled.

Liens help those who file them receive payment by tying up the property and holding property owners accountable, among other things. In rare cases, when property owners do not resolve lien disputes informally, liens can be enforced in court and result in foreclosure of the property in order to pay outstanding debts to those who filed the lien.

Also known as: Notice of Claim of Lien, Statement of Lien, Statement of Claim and Privilege, Construction Lien, Affidavit of Lien, Memorandum of Lien

Pre-Lien Notice

Generally speaking, this is a catch-all phrase that includes any notice sent or filed before one files a lien. Preliminary Notices and Notices of Intent to Lien are examples of pre-lien notices.

See: Preliminary Notice, Notice of Intent to Lien

Preliminary Notice

Notice given to project leaders (e.g. general contractors, property owners) at or near the start of work on a project. This notice (1) makes leaders aware of your involvement on the project, (2) protects your right to file a lien later on in cases where preliminary notices are required.

Also known as: Pre-Lien Notice, Notice to Owner, Notice to Owner and Contractor, Notice of Furnishing, Notice of (Lien) Rights, Notice of Contract, 20-Day Notice.

Notice of Intent to Lien (NOI)

NOIs are a warning, sent to project leaders before filing the lien. NOIs are required in a small number of states, in which case it is mandatory to send them first in order to file a lien. When not required, NOIs operate as an industry-specific demand letter that prompts payment by threatening to file a lien. They also give debtors an opportunity to pay before having a lien filed against their property.

Also known as: Notice to Owner, Notice of Non-Payment, Statement of Account, Notice of Unpaid Balance

Lien Waiver

Waives the right to file a lien and go after a specified sum of money. Lien waivers can be conditional or unconditional, and may be for final payment or for a partial/progress payment. Lien waivers are not usually required, but are frequently exchanged when payment is made. In 12 states, when exchanging waivers, you must use specifically designated documents as a template.

Release of Lien

A Release of Lien releases, or cancels, a lien that has already been filed, removing the lien from the property it was filed against.

Also known as: Lien Cancellation, Lien Release

 

PUBLIC PROJECTS

Bond Claim

A lien for public projects, effectively. Contractors and material suppliers can file a claim against a bond if they have been unable to collect money owed for work they performed on a project with a bond.

Bond claims, like liens, must be recorded with a government office and often require that you have files or sent certain documents before hand. A bond is required on public projects by the Miller Act or Little Miller Act, and is usually obtained by the general contractor as a form of insurance, should there be an issue with funds.

Payment Bond

A bond posted by a contractor that benefits all subcontractors and material suppliers below that contractor. In the event of payment issues, those subcontractors and suppliers can file a bond claim against the payment bond. Payment Bonds are more common than Performance Bonds, which they are often confused with.

Performance Bond

A bond issued by a surety, bank, or oanother guarantor to the benefit of the property owner. The property can make a claim against the performance bond if any contractors do not perform their jobs.

Surety

The party that pools together the money for a bond (and puts forth the bond) for a public project. This could be a surety company, a bank, insurance company, or any other guarantor.

CONTRACTS

Pay-if-Paid Clause

A clause often found in construction contracts that states, Party A will only pay Party B if Party A is paid first. This provision is a tactic that attempts to shift financial risk and place the burden of non-payment on lower-on-the-chain construction parties (e.g. subcontractors and material suppliers).

Courts generally look upon this provision unfavorably and routinely treat it as a Pay-When-Paid clause. In some states Pay-If-Paids are completely forbidden from contracts.

Pay-When-Paid Clause

A clause often found in construction contracts that states, Party A will pay Party B only when Party A is paid. Unlike the Pay-If-Paid clause, courts read this to be a timing mechanism (payment must ultimately be made), and not a risk-shifting mechanism. If the paying party (Party A) does not receive its payment, courts generally require that payment be made (to Party B) within a “reasonable” amount of time.

Joint Check Agreement

An agreement stating that two or more parties will be co-listed as payees on a check when payment is made. For example, a material supplier might require a joint check agreement before going to work for a subcontractor, so that when the general contractor cuts a check, it is made out to both the subcontractor and the supplier.

Change Order

An amendment to a contract that includes changes, or additions, to originally agreed upon work (or materials), and corresponding changes in financial compensation.