Detailed Review and Tracking of Prelim Notices and Releases

2 weeks ago

Hello,

I work for a construction management firm (not a general contractor), and we approach the preliminary notices and lien releases from the property owner/client’s perspective.

Our policy is pretty simple:

– Track receipt of prelim notices
– For pay apps, track conditional releases for current and final/progress for prior releases from general, subs, suppliers, etc.
– For final pay app, collect unconditional/final from general, subs, suppliers
– We have a form and policy to track individual prelims and releases

The problem is in the detail of tracking the prelims and releases. Here are some examples/questions we have:

– We don’t often get copies of all of the prelims, so we don’t necessarily know who to collect releases from. How should we manage this?
– Amount of release – we try to match it to the pay app schedule of values, but this often doesn’t tie. Should we forget the amount and worry only about the date on the release?
– Should the total of all releases match the total of the pay app? Or specifically, should the subcontractor portion of the pay app equal the total of all subcontractor releases? What if they don’t match?
– How do we know we’ve gotten releases from all subs and suppliers? We request subcontractor lists from the GC, but it doesn’t normally include the 2nd tier or suppliers.
– How do we manage risk and protect our clients best? Is it okay to get 80% of releases for progress payments?
– What if the conditional release and unconditional releases don’t match? For example, either the amount has changed, or the Through Date is different.
– If the Through Date on the unconditional release is later than the Through Date of the conditional release, is this okay to accept? What if the Through Date on the unconditional release is earlier than the Through Date of the conditional release?
– How do we handle self-performed work by the GC?

Thank you in advance for your help!

Senior Legal Associate Levelset

Managing the collection of preliminary notices and mechanics lien waivers is tough business for construction managers, owners, and other parties atop the payment chain. I’ll address your questions in more detail below, but generally, this part of the project is best improved through the use of technology and by creating a more transparent, communicative, and collaborative project.

On that front, here are some resources I think will be valuable:
(1) How To Handle Requesting & Tracking Lien Waivers
(2) The Future of Construction Payment Is Technology-Enabled Collaboration
(3) Lien Waiver Software Guide
(4) Construction Document Management Presents Unique Challenges

Anyway, let’s look at your specific questions.

1. Getting prelims from everyone/ knowing who to collect lien waivers from

At times, there can be stigma that surrounds prelims. However, encouraging your contractors, subs, suppliers, etc. to send preliminary notices can go a long way. If they know the highest tiers of the project actually wantprelims, they’ll probably be more inclined to send them. Encouraging others on the project to request lien waivers from their subs, vendors, etc. can go a long way too. And, making the use of notices an actual contractual requirement might work here too. And, if that doesn’t work, it may be helpful to remind everyone that they could actually be fined by the CSLB for failure to send notice. Levelset discusses that here: Get Fined If You Don’t Send California’s Preliminary Notice.

Prelims aren’t the only way to get visibility on everyone in the payment chain, though. Requiring that every party provide a list of their subs and suppliers along with their contact info can make life a lot easier. That way, you can collect lien waivers from parties who did not send preliminary notice as well. Naturally, those parties may not actually even have lien rights if they didn’t send notice – but having a waiver in hand is still a worthwhile pursuit since it’d streamline any mechanics lien dispute.

2. Amounts on lien waivers not matching

It makes sense to match lien waivers to pay apps, but if there’s work that’s performed but not reflected in the schedule of values, rights for that work might not be waived. Still, if the schedule of values on a pay app + the change orders for that pay app don’t add up to what’s actually being paid and waived, that might be a whole different cause for concern.

As you mentioned above, the through date might be even more important than the amount on some waivers. And, as I think you’re hinting at above, the through date marks the date through which lien rights are waived. When an unconditional waiver is exchanged and the would-be claimant waives all of their rights for that period/for the job, that through date may ultimately be the end-all-be-all. That waiver, save anything in the exceptions section, would waive lien rights up to the through date that’s identified. But, when a conditional waiver is exchanged, that waiver conditionally waives the right to lien for the amount and period identified in the waiver. So, if some work is done but not reflected on the conditional waiver, even if payment is made in full for that particular conditional waiver, some lien rights might not be waived.

As a result, a better way to go about things might be to match lien waivers with the payment that’s actually disbursed, and separately comparing what’s being paid out vs. the schedule of values might make more sense. And, after doing the above, it should be easy to determine where if there are any gaps where payments weren’t made or where rights weren’t waived.

But ultimately – if there are persistent concerns that pay apps aren’t totally reflecting the work that’s been done, it might be time to require more detailed record-keeping from contractors (and their subs and vendors). Any time the amount paid out exceeds what’s covered by lien waivers, the project is exposed to a potential lien claims. Of course, sub-subcontractors and other lower tiers could still ultimately have some lien rights even if their customer has provided a full waiver. So, it shouldn’t be that uncommon for the total amount on waivers received to exceed what’s been paid out.

3. Knowing each sub, sub-sub, and supplier has sent a waiver

I think a lot of the information shared above will help here. As you mentioned, collecting a list of all subs and suppliers from a GC is a great start here. But, also making that GC collect information from their subs and suppliers is an additional step that can be taken – and that requirement is something that could easily be included in a construction contract. Plus, with a proper flow down provision, it might even be incorporated into every tier of the project.

As mentioned above, though, encouraging everyone on the project to communicate and send notices is the first step toward collecting waivers. And, considering the fact that they’re literally required to provide notice (by the CSLB), it should be relatively easy to get that ball rolling.

4. Waivers not matching

Ultimately, in terms of protection, what’s on unconditional lien waivers is what’s most important. Conditional lien waivers exceeding what’s on the unconditional lien waivers would be much more concerning than the other way around. At the same time, those amounts should generally match up as long as everyone is submitting conditional waivers then ultimately conditional waivers.

Naturally, unconditional final lien waivers are the most important of all. The through date on these waivers will cut off all of the submitting party’s lien rights. Plus, if a party is reluctant to provide their unconditional final waiver, that’s probably a good indication of some uneasiness about payment – so, following up with that party should help determine if there’s any cause for concern.

5. Self-performed work by the GC

This, too, comes back to record keeping. It’s crucial to ensure the GC keeps good records on what they’re owed for their own work. So, making it a point to the GC that they’ll only be compensated for the work that they document might be a good way to ensure that work is accounted for. And, collecting a waiver from that GC for the work they do themselves should be just as important as collecting a lien waiver from anyone else on the job.

I hope I was able to answer most of your questions. Apologies if I was all over the palce, but that was a lot of ground to cover! Of course, feel free to respond here or post another question with any other questions you may have.

If you’ve got other questions about California lien waivers, here are two additional resources I think will be really valuable:
(1) California Lien Waiver Forms & Guide – All You Need to Know
(2) California Lien Waivers Guide and FAQs

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