Free CLE: Four Vital Documents For Preventing Construction Disputes
Construction disputes can arise in a variety of ways, and for lawyers the approach to the issue will be unique to each client. However, some issues ring true regardless. Proper paperwork and documentation can go a long way in preventing construction disputes before they come up.
Join this free digital CLE led by attorneys Nate Budde and Matt Viator to learn about the four documents that protect your construction clients from disputes. This is an advanced course that awards a one hour CLE credit in Louisiana. The course may also be eligible for CLE credit in other states.
What we’ll cover:
- The ideal construction contract: from language to scope of work and material requirements, to proactive payment protections and closeout procedures.
- Properly preserving lien rights with preliminary notices
- Creating a simple but effective change order process
- Understanding the types of lien waivers and how to use them
- And more!
Kathryn Barona: (00:04)
Hi, good afternoon, everyone. My name is Katherine Berona with Levelset and we’ll be hosting a webinar today with Matt via tour and Nate buddy, who are with Levelsets, legal team. And they’ll be presenting four vital documents for present preventing construction disputes. I’ll just turn it over to Nate and Matt now join the webinar and if you have any questions, just type them in the chat box and we’ll address those. Thank you.
Nate Budde: (00:36)
All right, everybody. Um, it’s one o’clock so it’s time to time to get going. Um, hopefully we’ll have some, some helpful information for you here. We’re going to be given a high high-level overview, um, of these four vital documents and try to get so that, um, you can avoid construction payment dispute for your clients. Um, I am Nate buddy. I’m the chief legal officer here at level-set. I have been, um, at Levelset for nine years now, um, working to help, uh, construction participants, avoid payment problems. Uh, before that, um, I worked as a construction and, um, maritime attorney. Um, so I’ve got some experience in the space trying to make sure that that people get paid on time. Um, and Matt here works, um, with asset Levelset, doing the same, doing the same stuff. So hopefully we’ll be able to provide you with some good information you can take to make sure that that clients get paid fairly and, uh, avoid disputes because we said, um, these are the four documents that we’ll be going over. We have some additional documents as well, um, at the end as a bonus, but breaking it down mostly with four, um, specific documents that are most, um, applicable to helping avoid disputes over payment in the construction industry.
Nate Budde: (02:09)
Uh, and so the three major causes we see for construction payment disputes tend to be poor communication, lack of trust and slow payment. Uh, those all tend to be interrelated, uh, in most situations. And so these documents are kind of geared towards that. Um, I’ll also say that, uh, our point of view, most often we’re talking with construction businesses, typically small and medium sized businesses, as well as nationwide materials, suppliers and equipment rental companies. Um, so a lot of our point of view speaks directly to them. So we’ll just encourage you to kind of try to keep that point of view in mind. Um, and that’s something that you can bring to your clients. Um, and on top of that, we also recognize that every situation is different and everyone’s approach is going to be a little bit different, but we still think that these things tend to ring, ring true for every construction project and they can
Matt Viator: (03:00)
Really benefit any business. Yeah, I’ll second what Matt said there, um, with our point of view, being directed mostly towards, um, the companies themselves, it’s good to keep in mind that, um, you know, what’s good for the company is ultimately good for us as attorneys. Um, we may, we may have certain instances where we bill for we bill more for disputes than we do for avoiding them, but the more that we can get, um, our clients and these companies to avoid problems in the first place, the happier they are, um, and the better, the better it works out for everybody. So with that being said, um, I’ll start. And the first, uh, document as one would expect, um, in avoiding payment disputes and making sure that construction projects run smoothly is the contract itself. This is the basis on which all construction projects, um, are founded.
Matt Viator: (03:57)
Um, there’s, uh, an immense amount of variation, um, between contracts for different types of construction projects, but there are certain things that, um, we think are worth considering, um, to make sure that each and every project runs smoothly, right? So like just like Robert Frost and good fences make good neighbors a good contract makes a good construction project, but what constitutes a good contract, um, can sometimes seem different to you and me, um, as attorneys, then it can, that are actually working on the construction project itself. So as a lawyer, um, a lot of the time we think that a good contract and an appropriate contract, um, is a contract that has everything specifically defined. Um, the contract is completely comprehensive. There’s nothing considered, um, uh, superfluous. There’s nothing not considered. There’s nothing left to chance. Every procedure, every potential possibility has been thought through papered listed down, um, and, and discussed and documented, right.
Matt Viator: (05:12)
But in many cases that may not be the type of contract that is most efficient to get a party paid in construction. Um, there are obviously benefits to making sure that things are covered and things are contemplated by the contract and that the contract is clear, but a simple agreement that everybody understands and doesn’t result in a legal language can really help people understand what their obligations are and what the payment timings are and the payment obligations and making that into a streamlined situation. So like, like we said, as lawyers, sometimes we make our money dealing with complexities, um, and out disputes and provisions in court and relying on an airtight contract that we can point to as something that is very specifically defined, makes us feel good. And it makes us feel like we’re doing our job. But when in the, the reality is that the faster our clients get paid, the better it is for them.
Matt Viator: (06:17)
And the more likely it is that they’re going to use us and recommend us later. Right? So the best way to a good outcome for your client is to set up the contract. So you don’t need to deal with all the complexities and you don’t need to deal with figuring out what the provisions mean later, and you don’t need to figure out, um, arguments related to specific clauses in terms in there. And that everybody understands very simply what is expected and the timeline. So John, the best path is to make sure that the contract is only as complex as is needed for the specific job that is being completed. Right? So clearly I’m going to build you a house for 300 K like written on the back of a napkin. Isn’t going to get it done. Like that’s not ever going to cut it, but if you can excise some of the complexities from, um, how a contract is sometimes considered, uh, best put together, if we can, if we can take out some of the excess verbiage, um, it can really be a benefit, complexity begets complexity. So the more words we have in the contract, the more clause is the more complex it is. Um, the more likely it is that either your client or, um, their subs, their sub subs, their, their customers up the chain, um, won’t necessarily understand it or will be more likely to dispute some particular part of it. And the more likely that somebody, um, the more that somebody doesn’t understand, the more likely it is that payment can get stuck and it can become slower.
Matt Viator: (08:02)
So the first part of this, uh, process in simplifying, um, construction contracts to speed up payment, we need to be fair like as attorneys, right? So fairness is something that they teach us in kindergarten. It’s not something that they teach us in law school. Um, we are as attorneys obligated to promote the best interests of our clients. Um, and a lot of the time we treat promoting the best interest of our clients as a mandate to seek leverage, um, in, in my opinion, and in the experience of working with construction companies a lot, um, while some leverage can be beneficial, seeking the leverage for the, the, the pure purpose of exerting, some sort of power over other parties in the construction chain doesn’t promote the client’s best interest because it is a straight path from doing everything to promote, leverage, to confusion, and to disputes, nobody likes to be taken advantage of the more somebody feels like they’re taped being taken advantage of whether or not that’s true.
Matt Viator: (09:15)
The more likely that there can be a dispute on the job. So being fair, um, I think breaks down into three sub points, uh, that you can see on your screen there. Um, these are not inventing unnecessary requirements, not trying to sneak in an advantage or steal an advantage, um, where there doesn’t need to be one and not having the contract appropriately and sufficiently contemplate what a reasonable schedule and budget is. And I’ll talk a little bit more about each of those. So with unnecessary requirements, um, we as attorneys want to make sure that we always, uh, cover ourselves and our clients to the full extent necessary, uh, available not necessarily to the full extent available. So like if a signature is good, a notarized signature is better, right? But when we add these types of requirements, we are slowing down a process that doesn’t necessarily need to be slowed down that is otherwise sufficient with the minimal requirement rather than the, um, over engineered requirement.
Matt Viator: (10:35)
So for example, um, there’s only three States that require the notary notarization of lien waivers. If we make it a standard clause in all of our construction contracts that we need Notre, uh, waivers to be notarized by every party down the chain, in order to release payment on a pay app, or in order to release a draw, all that’s doing is creating, um, confusion when people don’t know why that’s required, it’s creating a slowdown in the payment because people will have to go back and, uh, and get waivers notarized when they didn’t in the first place, or just making it more time consuming and difficult to provide the documents that they need to provide in order to get paid when it’s not necessary, it’s not necessary. And we should take that out in order to make a payment come faster. Um, the next point is to not try on try to steal an advantage, right?
Matt Viator: (11:28)
Lots of contracts include risks, shifting provisions, other protective provisions, and that’s fine. Like there are absolutely fair ways to do that and reasons why it would be appropriate to include, um, certain language that is designed to protect your client from taking an unreasonable or an unnecessary financial hit. Um, but these clauses should be used appropriately and they should be used accordance in accordance to the requirements of the state and, uh, the project specifically. And they need to be, um, discussed and negotiated, or at least, um, made aware beforehand this isn’t something to sneak into a contract in the hopes that somebody is not going to notice it because that’s going to lead to a dispute that’s going to lead to litigation, or the very least like payment issues. It’s something that we want to be upfront about. We want to discuss why, um, these clauses are being included.
Matt Viator: (12:26)
And, um, we want to make sure that to the extent some of these causes are, um, looked upon unfavorably or regulated by state law. We want to make sure that we are staying in conformity with those particular requirements, right? Many States disallow, no lien clauses. Um, it makes sense for a GC or a property owner to want to include something like that in their contract. They don’t want to suffer, um, a double payment responsibility, or they don’t want to have the property. Um, the property encumbered by a mechanics lien by somebody that not getting paid, that we don’t even know who they are, right. But lots of States disallow, no lien, clauses or waivers in advance of the performance of work. And so despite any severability clause you might have in your contract, you want to avoid the situation where part of it’s going to get thrown out if it’s not available, um, to begin with, uh, no lien clauses in the, in the, like are very unfavorably looked upon by courts because contractors, subcontractors, material suppliers are giving them, uh, a statutory right to use the mechanics lien, um, instrument as security to recover, uh, the payment for what they’re for what they are owed.
Matt Viator: (13:43)
And then finally, um, as a general overview of the schedule and the budget should be reasonable, right? It’s not uncommon for a contractor to bid low on a project in order to get awarded that work and then try to make up the difference in change orders. And this is a direct path to payment disputes. Um, change orders are part of construction. We’re going to talk about them more in a little bit, but like a preemptive reliance on a change order to, um, modify the scope of a project because you have an insufficient, uh, contract is a very, very quick way to have your client in a payment dispute where either they are looking for payment for work that should have been contemplated by the contract to begin with, or they are attempting to, um, understand what their obligations are with respect to payment, to other parties down the chain, because the expectations were not made clear. I have a very easy way to run into payment trouble, um, for a is to materially change. Uh, what is expected after the contract has already been executed to begin with, um, things that should things that are known should be in the contract at the start of the year.
Speaker 4: (15:08)
Matt Viator: (15:13)
So with those three points, um, being said for how to make what the fairness parts of making a appropriate construction contract are, um, how do we go about it? Right? The first step in making these things fair is simplicity. Making a contract simple is a really good way to preemptively avoid the payment disputes because everybody knows exactly what is supposed to go on. The easier it is for somebody to understand what their obligations are and what everybody else’s obligations are. The easier it is to make sure that everybody gets on the same page. And that includes payment. Um, obviously simplicity and a construction contract is relative. And it changes according to the job I putting a roof on a house is very important. Um, but the contract is going to be obviously several orders of magnitude, less complex than a master agreement to build an airport.
Matt Viator: (16:14)
I th the, the range of complexity contemplated by construction projects is as varied as the construction projects themselves. So there is no one standard off the shelf, um, contract that’s going to be completely relevant to every project and is going to make sense. Um, we like to rely on form banks, right? We like to rely on, um, documents that we can just slightly modify and use for multiple things. Maybe that’s okay if you have a client who is doing the same type of work over and over on the same type of jobs in the same state, that’s, you know, that’s probably perfectly reasonable, but, um, when the construction work itself, isn’t standardized, when there are different projects going on, we need different contracts with different sections to, to, um, consider that individually so that each contract only includes what’s needed, right? That we can make things more simple by taking out the things that aren’t needed, and only including those on the ones where we think it’s going to make a difference.
Matt Viator: (17:22)
So in that vein standard contract documents like the AIA and consensus docs, um, they can be a mixed bag like overall, they’re fine, they’re standard for a reason. Um, they are understood in the industry. Um, if they’re not heavily modified parties, generally understand what they’re going to get with this type of document, which is, which is a positive, but, um, there are a lot of sections that may be superfluous to your client’s particular needs and having a, um, very text heavy, considerably, longer document than necessary is just providing additional chances for there to be spots where disputes can bubble up. Um, different projects may require, um, some, but not all of the sections of these standardized agreements. And it’s in our client’s best interest to take out the stuff that is only going to cause confusion, um, because that just relates in a slower project for everybody.
Matt Viator: (18:24)
Um, it’s also important to note that specific jurisdictions have different requirements for contractual language, um, that must be provided in a contract or provided in a notice associated with the contract. And that’s especially true, um, with respect to parties who contract directly with residential homeowners. So if you have a, you know, a small GC or a supplier or somebody who is contracting directly with a residential homeowner, there are specific, um, requirements in many States as to what can or can not be on the contract and what the language, um, even must look like in terms of formal requirements. And I’ll talk about that a little bit, um, a little bit later, but failure to follow these, um, statutory requirements in the States where that is an issue can be severely detrimental to your client in terms of limiting their, um, protection or their ability to recover in the event that there is payment issues that arise, um, on the project.
Matt Viator: (19:33)
So the, the, the main purpose of a contract should be to get everybody aligned and on the same page with what’s supposed to go on, right? There’s no excuse for ambiguity in the project scope, um, and a reliance on later change orders, um, because that’s, that’s cooking up, that’s cooking up trouble. Um, the, the, having a contract that doesn’t make it crystal clear, what everybody is expected to do is the easiest way to a payment dispute on the construction project, because it’s complex enough as it is. There’s multiple parties, as we all know. Um, and if the GC expects something to get done, um, and our client is for a subcontractor. For example, if we don’t know that that’s our job, and it’s not specifically delineated, we’re not gonna do it. We don’t want to do extra work, right. We assume that somebody else is going to be there.
Matt Viator: (20:29)
And then when we want to get paid, there’s going to be a problem. So it’s our job as lawyers to protect our clients, by making sure that this, um, part of the contract is absolutely explicit, um, work disputes and scope disputes lead directly to payment disputes. Um, but if the contract itself provides a crystallized view as to what is expected, um, it cuts off avenues for these payment disputes to gain steam. Um, so like that sounds relatively simple, right? Like define the work appropriately. And then when you do it, you get paid. Um, it is simple when you talk about it in these high-level terms, but the specific work that could be required for any particular party on a construction project is so varied and nuanced that it can be difficult to provide the appropriately structured and crystallized view as to what is supposed to go on. So that’s, this is really where we can earn our keep as construction attorneys, um, and keep our clients out of trouble, um, by specifically defined meaning for them. Um, it is that they are expected to do with respect to the contract so that they are, um, they’re, they’re cleared of disputes later.
Matt Viator: (21:52)
So I said, we shouldn’t rely on change orders to, to change the scope of the contract, um, which is true, but no matter how much we want to make the contract airtight and how much time we spend defining the scope and making sure it is explicitly and perfectly defined, there’s going to be things that come up to modify it. Um, construction just is this way. There’s not a single project that has ever been, um, in which it went from, start to finish without somebody changing something or somebody wanting to change something. That’s just exactly how it goes. Um, and that needs to be addressed. And this is fine like that it’s contemplated, but in order to protect our clients, um, we need to realize this ahead of time and set out a clear, easy set method for dealing with these types of change orders so they can rely on them, right?
Matt Viator: (22:42)
So since change orders modify the contract, um, they should follow the same general rules as the contract itself, um, may, should be in a form that’s appropriate to modify the contract. Um, in my view, this means that change orders should always be written. Um, verbal change orders are a very easy way to get yourself into a payment dispute. So we should counsel our clients to always make sure that any change or modification to the scope of their work is, um, set forth in writing, set forth in a specific way, and then approved in a specific way. So that doesn’t mean that we need to add complex requirements. Like we talked about earlier. We don’t want to do that. We can easily set forth in a contract that a change order can be, um, requested and approved through, um, text messages or through email with electronic signatures. That’s fine. And it speeds up the contract modification so that we don’t have payment disputes here. We just need to make sure that we set that out to begin with. So everybody has the same expectation. Um, we don’t need overly burdensome procedures. We just need to make sure that there are
Speaker 5: (23:57)
Matt Viator: (24:01)
Um, other than a scope change order disputes, right? That the easiest way to have payment dispute is through, um, confusing or unreasonable payment timing provisions themselves. And this makes sense, right? Like the, the easiest place where for a payment dispute to arise is from payment or the lack of payment and the timing related to the payment. So the contract should specifically set forth clearly, um, when payment is due and on what parameters, no matter what type of contract you’re working with right there, there’s a monthly draw schedule. Um, whether it’s pursuant to the meeting of certain project milestones, um, whether payment is going to be in a few lump sums, no matter what it is, we want to make sure that that is completely and specifically defined. So that again, later there’s no, um, there’s no dispute or there’s no uncertainty over whether or not payment is due on a time manner.
Matt Viator: (25:01)
And that will result in fewer, um, disputes in the long haul. Um, note again, however that many States have specific requirements with respect to payment timing. So for example, um, like a residential project in California, you’re going to want to know and make sure that your contract contemplates that you can’t request any more than 10%. Um, down as a, down, as a down payment before work begins, we’re going to want to make sure that the contracts that we are creating for our clients, um, don’t put them in a situation that voids their contract because we asked for 20% upfront, uh, because we knew we were going to need a lot of materials. So it’s important to look at the particular jurisdiction for rules and requirements like that. And, um, nearly every state has prompt payment requirements that also dictates, um, payment timing. Um, sometimes you can modify these by contract, which is great news for people who want to, to, to, to work with that.
Matt Viator: (26:03)
But in other States, the payment timing provisions set forth by the prompt payment statutes can’t be modified. So we need to look to make sure that a, um, payment of, um, a payment to a subcontractor 15 days after we receive payment from the owner, if we’re representing a GC, um, we need to make sure that that’s okay and not a violation of a prompt payment, uh, provision that says we need to pay in 10 days. We need to make sure that the contracts we’re setting forth, um, contemplate that, um, and finally retainage, every contract has retainage, but making it confusing to when that retainage amount, um, is going to be released or even what the retained amounts are going to be, um, is another easy way to get involved in a payment dispute. Again, much of this is, uh, regulated by state statute. The amount of retainage that can be withheld or must be withheld, um, various by state, um, as do the timing provisions for one retainage must be released, but it’s something that we need to contemplate in the contract at the start in order to avoid payment disputes later.
Matt Viator: (27:17)
And then finally, um, for contracts, the contract needs to contemplate, um, its own end, right? It needs to think about how the job is going to end before you even start because, um, let’s face it. Most of the, most of the disputes over payment are going to be like when the work’s finishing up and everybody needs to finally get paid. Um, obviously there’s payment throughout the project, but when we’re closing it out and looking for the last bit, um, everybody is on a little bit higher alert because that last bit can represent the entire, uh, the entire profit for your client on a job. So if something gets stuck at the end, um, they can be, they can be out there, their profit on a job, and we don’t want to see that happen. So we need to make sure that out procedures and punch-list procedures are very strictly defined in the contract. So everybody again, understands their obligations and understands the timing related to them getting paid and how they close out their
Speaker 6: (28:17)
Matt Viator: (28:20)
We need clarity here so that we can, we can avoid payment problems where somebody thinks they’re done and thinks that they are, um, supposed to have been paid when they actually haven’t finished the job according to what needs to happen. Um, so expectations for finishing punch list expectations for callback work should be defined in the contract itself. Um, and then a special notes, like I said earlier, um, there are many jurisdictions that have additional requirements for contracts with residential homeowners. Um, residential homeowners are granted a lot of protection in the lives of many States. And we need to contemplate that for any client who is doing work, um, on a, on a home improvement project or building a residential structure.
Speaker 6: (29:13)
Matt Viator: (29:16)
These requirements can be, um, merely content, but they can also be the form of the content, the size of the type, um, specifically what a form has to look like, whether there’s a right of rescission of the contract, California allows three days for a residential homeowner to decide they don’t want to deal with the contract anymore and just give the materials back and be done with it. Um, so these things we to, we need to think about another example is in Texas, um, somebody who performing work on homestead property, isn’t granted a lien rights to secure their payment and less certain things happen. They have to record the contract with the County recorder for the County in which the work is doing is, is, is, is, um, occurring. And they need to make sure that if the homeowner is married, both spouses have to sign the contract, even if only one of the spouses appears on the deed to the property, right? So this can lead to your client needing to have a, an awkward conversation with the property owner to try to figure out if they’re married and then having both of those people, um, both of those spouses sign a contract in order to retain their rights. And this is something that we need to make sure as attorneys protecting them and protecting their payment that they know beforehand.
Matt Viator: (30:43)
Nate Budde: (30:43)
And, uh, so the next document that we feel is, uh, is a key document for, you know, for stopping these payment disputes from happening, um, in the first place is the preliminary notice. Um, every construction lawyer is going to be familiar with preliminary preliminary notices. Um, but we kind like to challenge the way that they’re thought about in the industry. Um, and so for those of you representing, uh, clients that are more in the small business or the, uh, down the payment chain roles like equipment, uh, suppliers and material suppliers, uh, preliminary notices are, you know, they’re, they’re, they’re viewed as a, uh, as a way to secure your rights payment later on. Um, and that’s certainly true. Um, and then for general contractors or other type of chain parties, maybe like developers and lenders, a lot of times the receipt of a preliminary notice is seen as more of a headache. And, uh, we want, we want to challenge those points of views just a little bit.
Nate Budde: (31:37)
So first, what is the preliminary notice? Um, they go by several different names. You’re all familiar with, um, in California, the 20 day notice, which called prelims notice to owners in Florida notice the furnishing and the Midwest notice the contractor and some places even called them. Pre-lease notices, which we tend to try to push back on because they’re not put our notices are ultimately informational documents, and they’re not really an indication that there’s a problem on the project or that there will be one later on. Um, so to reiterate preliminary notices there just informational letters, there are notices they’re informational documents sent at the outset of the project. Uh, typically it’s very early on in the project cycle. Uh, like I said earlier, California’s the 20 day notice. Um, and they’re sent early on the job so that everyone understands who all will be performing work on the project.
Nate Budde: (32:25)
And it’s really beneficial for those at the top of the job. Um, whenever, whenever someone at the top of the job receives a preliminary notice, they’re receiving really important information about their project. Um, others are letting them know I’m on this job. This is the work on performing on this job. This is who hired me. And it explains, it explains all the information while also giving you their contact information, which later on down the road could be really helpful. Um, and it sets the tone early on the project. It, whenever preliminary are sent it boosts transparency and, uh, collaboration on the job, and it opens that line of communication early on, and it lets others know that the sender is there. They’re professional about the way they’re approaching the job and that they’re taken seriously. Um, so going back to letting others know you’re on the job.
Nate Budde: (33:15)
Uh, so this is more geared towards those small to medium businesses or those, uh, equipment rental companies and material suppliers that are further down payment chain. Uh, so there, there are lot lots of moving parts on every construction job. Uh, there, there could be dozens of different subs and suppliers performing work, and it’s common for owners and GCs to be totally unaware of some of those people at the very end of the payment chain. Um, and whenever they don’t know you’re on the job, how can they make sure that you’re being paid? So by sending a preliminary notice, you’re preventing, you’re preventing being lost in the shuffle. Uh, it gets the attention of upstream parties by sending them, uh, this, the note, the notice it gets their attention, and that’ll be helpful later on, especially if payments or payment issues arise. Um, and as you all know, sending preliminary notices in most States is a prerequisite to preserving your mechanics lien rights.
Nate Budde: (34:08)
And so whenever you’re dealing with an owner or GC construction manager, who, whoever it may be, whenever they understand the import, the import of that preliminary notice, that helps to make sure that your invoices rise to the top of the stack later on. And they know that if you don’t get paid, you understand your rights, you’re willing to use your rights and you’re entitled to, uh, to leverage them. Um, but it also opens a lot of communication, Hilary notices, again, they’re just informational letters and they provide the contact information. And so if there’s an issue on the job later on, they know where to reach out, they know who to contact, whether that be a payment issue. Um, whether that be, you know, maybe part of the job isn’t being done at the specs, or maybe something someone’s falling behind. If the GC can look at their receive preliminary notices and immediately identify who is responsible for that work and how to contact them, uh, it’s much easier to straighten things out.
Nate Budde: (35:04)
And as mentioned above, uh, it adds an air of professionalism. Um, it’s, it’s almost a, a, a hidden perk, but whenever you sending culinary notices, you’re letting others know that you know what you’re doing, and whenever you do it with proper paperwork, which we’ll get into in a second, whenever you do it with, you know, professional paperwork, it, it just adds an air of professionalism to your business. Um, we all know that small construction businesses don’t always have the time to really professionalize some of their backend operations or some of their documents, or maybe their, uh, their outward presence, their marketing, but by sending those documents, you’re letting everyone else in the, on the job know that you’re really taking things seriously. So preliminary notices, preserved mechanics, lien rights and mechanics liens are probably the most important construction payment remedy. Um, the majority of States have some form of a preliminary notice requirement.
Nate Budde: (35:58)
So typically that notice must be sent for mechanics lien rights to be available later on in the job. Uh, I, I don’t have to explain how, how important it is for small businesses or businesses down the payment chain to preserve their mechanics lien rights, because, you know, if, if things go sideways and if there is a dispute, there’s, there’s not a payment tool, that’s much more effective than that. Um, and they make mechanics liens. They, they, they offer an opportunity to establish a dispute and to make a claim without having to go straight to litigation. Uh, as attorneys, obviously we’re not as adverse to litigation because that’s, you know, that’s, that’s, that’s where our bread gets buttered. But for, for clients that are looking to avoid some of those costs and to avoid these disputes in the first place, uh, if they do ultimately have to make a claim, a mechanics lien claim is going to be one that’s pretty favorable to them because it’s got a lower barrier to entry.
Nate Budde: (36:50)
The cost is going to be lower. And so by sending that preliminary notice at the beginning of the job, you’re, you’re preserving that right for later on. So you’re, you’re, you’re paving the road for them to, to have an easier way, uh, to get paid if things do go sideways and, uh, and when lien rights are available, invoices get paid faster. I think I mentioned on the last slide, but whenever everyone on the project understands that your rights have been preserved, they’ve been actively taken care of. Uh, they’re more inclined to say, okay, well, wait, we w we know that they they’re, they know what they’re doing. So we’re going to make sure they get paid because I’m a mechanics lien could really create this create issues for us on this job.
Nate Budde: (37:31)
Um, we really prefer not to call them pre liens or Creeley notices, because that creates a false negative connotation. Um, whenever the word lien appears, uh, everyone tenses up, nobody likes to see it. And ultimately if you’re using preliminary notices on every job, and if everyone understands, you know, what their ultimate purposes to provide that information on the job and to kind of add the air of professionalism and institutes some collaborations from day one, if all of those purposes are understood, then the, including a word like lean would just kind of negate a lot of that positive energy going. But as mentioned above clarify notices, aren’t mechanics lien warnings, um, the, the key purpose is to share key information. And they’re not an indication that, uh, claims are looming. Um, unfortunately though, sometimes lean talk will be unavoidable. Um, some States call them pre-lines Oklahoma comes to mind, um, and it’s really for construction businesses to refer to them as lien notices. But again, the collaborative benefit of sending preliminary notices kind of gets knocked down a peg or two whenever you’re immediately thinking of lien claims,
Kathryn Barona: (38:49)
Hey, Matt, Hey, um, we do have a question. Richard asked our preliminary notices required in all States as a predicate for a lien, Maryland, DC, and Virginia.
Nate Budde: (39:04)
That’s a great question. Um, they’re not required in every state, um, off the top of my head, uh, uh, I believe DC is not a preliminary notice state. Virginia has some form of culinary notice, and they might be able to clarify on that, and I’m not immediately sure about Maryland, uh, Maryland and Virginia do require preliminary notices. Virginia has an interesting scheme in that, uh, there are potentially multiple notices. Um, they can be required a lien. Um, there is a section 43 11 notice in Virginia. They can be sent, uh, once at the start of work and another time at the end of work that works to, um, make the property owner personally liable for, uh, the value of the work that’s being performed even by, by a subcontractor, not just, um, the property itself through the mechanics lien, but as a, as a very generalized rule, um, there are more noticed required States than, um, States in which notices are not required, and whether they’re a specific prelim or whether it’s some other notice that provides a benefit to the potential claimant. Um, in another respect, most States have a notice like that. Um, they, the last time I saw it was something like 35 out of 50 States have some form of requirements.
Kathryn Barona: (40:32)
Okay. I just want to let everyone know out there watching that, um, the first code is coming up soon and we’ll be, um, getting through this preliminary notices section wrapping up here. So I know it’s one 40 now, but just, um, giving you a heads up. Thank you.
Nate Budde: (40:50)
Thank you. Uh, thank you for that question. Um, so I’ll kind of try to speed it up, I guess the ultimately there’s no need to over legalize templates, um, unless there is a need to, um, ironically, I guess, but most States don’t have particularly strict, um, language requirements for exactly how different things need to appear on the notice. And whenever given that freedom or whenever sending a completely voluntary, preliminary notice, uh, it’s generally better to kind of reinforce, um, the reinforce, the feelings that you want to be sending with the pillar notice, which is to establish transparency and collaboration on the job. Uh, but don’t, over-correct the issue putting all caps, this, not a mechanics lane. Um, sometimes it will be required, but generally, um, again, bringing up the word lien just brings up a negative emotions. Um, and from the general contractor point of view, or from the lender developer point of view, um, I think prelim notices are probably misunderstood.
Nate Budde: (41:50)
They’re a great opportunity to figure out, to create a project, trying to figure out who all was working on your job, who was hired, who, and whenever you have that top-down view, you can spot issues before they snowball, and you can contact the right party to clear up that issue. You can identify which performers are doing their job, doing it quickly and staying on budget, and you can keep them in your role at extra future projects. Cause you know, you want to work with them. Um, and then additionally, the biggest benefit probably is that, you know, who must admit lien waivers, uh, you know, who all is working on the job and you know, who you need to collect lien waivers from, because if the general contractor is only collecting waivers from the direct subs that could leave some exposure on the project. So knowing their subsets or their materials suppliers could be really valuable on that front, uh, here’s the first code.
Kathryn Barona: (42:37)
Nate Budde: (42:37)
I believe with the way we’re handling this is if you could message that code into the chat, along with your bar number. That would be great. Catherine, please correct me if that was, uh,
Kathryn Barona: (42:50)
That’s right. You got it.
Nate Budde: (42:53)
We’ll leave it up for a few more seconds here.
Kathryn Barona: (42:55)
Nate Budde: (42:58)
And if you do have issues, you can contact us afterwards and we can, um, we can make sure that everything gets done.
Kathryn Barona: (43:04)
Yeah. And I’ll put my, I’ll share my email address in this chat box. So if anyone misses that right now, just send me an email. All right, thanks. I’ll keep going.
Nate Budde: (43:17)
Alrighty. Um, so we talked about change orders earlier. So we’re going to go ahead and try to speed through this section somewhat, but the majority of construction disputes or construction payment disputes probably come from change order disputes. So, uh, we just felt it important to reiterate that, um, so never, but never rely on verbal change orders. I suspect that no one would advise their client to forgo a written contract. So if we’re going some formalized version of a, uh, of a change order is, is just not a good idea. And as Nate mentioned earlier, it should be in writing whether that writing is pen and paper, whether that is via email, via some software solution, or even as simple as a text message, uh, as long as you can, you know, all the elements of a contract are there. Uh, you can make that change where effective. And so again, going back to the contract, establishing a, a good change or a process is really important. Um, it should be really clear on how they should must be made. It should cover key issues, like how to request and approve them. Who’s authorized to approve them. Um, and simple processes are okay as long as you’re actually following them. And as long as the rules were set up beforehand, um, and again, you should set up, you just
Matt Viator: (44:32)
Set some process for pricing, whether that be a price on the actual change order, whether that be establishing the way that change orders will be priced in the contract itself, you should just be able to be able to figure out what the price is later on. Uh, and we’ll, we’ll go ahead and we’ll right through this slide and say that if you do set a process, you really need to follow it. Uh, you need to make sure your clients are following it. It’s really easy. It’s really tempting to prefer to do things by handshake and verbally on the project on site. But if you reiterate to them how, how important it is to make sure that process is locked down, uh, you can really alleviate a lot of their problems. And now I’ll pass it back to Nate for a quick talk about lean waivers.
Matt Viator: (45:16)
Yeah. So the last of the four documents, um, that we think are critical to avoiding payment disputes on construction projects are lien waivers, um, and the proper utilization of lien waivers, um, can speed up payment for those parties that you’re representing, who are towards the bottom of the payment chain. And it can avoid, um, it can avoid exposure to double payment or avoid, um, payment exposure for those parties that are, um, on the top of the chain, if you are representing a GC or a developer. So from a really high level, what are lien waivers, um, lien waivers, or the construction industries, um, receipt, right? So a party gets paid or is, um, promised payment. And in exchange for that, that payment or promise of payment, they give up their ability to file a lien, which makes sense. Um, once they’re getting paid, they don’t need the lien.
Matt Viator: (46:17)
Right. Anyway, um, some, some States referred to waiver and release of lien. Um, we like to draw a distinction between a lien waiver and a lien release as generally, if somebody is talking about a release they’re referring to, um, they, the, the release and cancellation of an already filed claim. Um, so we like to use waiver just to make sure that everybody’s on the same page. Um, waivers should be used, um, differently in different situations. I’ll talk in a minute about the different types of lien waivers, but it’s not necessarily a one size fits all, um, document. There are differences that need to be contemplated so that a client is understands what to use when, so as not to give up additional rights or, um, say things that they don’t mean to say, and in terms of avoiding payment disputes from parties, uh, lower on the payment chain or in a way to speed up payment, um, waivers should be included, um, with every invoice or with every, with every pay app and bundling from parties with whom they do business is a good practice to instill upon them, um, in order to make sure that they get paid faster.
Matt Viator: (47:39)
So if you are say representing a sub, if you, um, counsel them that as part of their standard practice, when they’re submitting a pay app, if they have waivers from everybody, they did business with, that’s going to significantly cut down their time to payment because there’s no need for the GC or the sub or whoever they contracted with to go back and request that, to make sure that they, um, are protected. So lean waivers affect, um, the project in, in really significant ways. Lien waivers are one of the most commonly exchanged, um, documents on a construction project because unlike the contract where you’re you’re, um, figuring it out ahead of time or even change orders, where changes may come up during the course of the project itself, lien waivers are exchanged every single time somebody wants payment. Um, and for most construction projects that lasts, uh, you know, significant amount of time, there’s going to be a draft schedule that has many, many payments going out.
Matt Viator: (48:41)
Um, substance suppliers are getting materials and equipment that needs to be paid and lien waivers need to be collected each time in order to make sure that the property, um, remains unencumbered by mechanics liens, which shut down, um, the, the project and the payment flowing, um, really, really quickly. So by exchanging lien waivers with every project, we can keep the project running, running smoothly and making sure that people know, um, that that’s something to look out for ahead of time, um, can make sure you can, you can help them with their process to make sure that they understand that and get paid quicker. So, um, like preliminary notices, there are certain state by state rules that you have to consider, um, in some States. So 12 States have statutory, um, requirements for the form of lien waivers and the content of lien waivers. Um, the, the language that has have to be included, um, those, uh, are on your screen.
Matt Viator: (49:49)
And I believe in the materials we provided, um, uh, waiver templates for some of these States to show, um, the statutory language. Some of these are interesting, and that Florida provides a statutory lien waiver form, but, um, allows construction participants to choose to use something else. Um, and the other States was statutory lien waiver forms. The statutory form has to be, um, used, or it, um, can potentially render that waiver invalid. Um, so this is something very important to note for those of you representing general contractors, um, or even potentially a property owner that they can’t in, in a state with a statutory waiver form. They can’t use a generic waiver that they just happen to want to use, or they can’t add a bunch of language to be further protecting of their rights because that can render the waiver invalid and, and, and give rise to a significant dispute.
Matt Viator: (50:54)
Um, like we talked about in the contract section, there’s only three States that require lien waivers to be notarized, um, everywhere else, that’s just superfluous and it is slowing down the process. But for those of you, um, who have clients doing work in Texas, Mississippi, or Wyoming, um, note that those do have to be notarized. So it adds an additional step to the process. Um, Wyoming is interesting in that it only has one singular waiver form, um, which can be confusing for a number of parties who understand how waivers, um, work in, in the majority of other States. So in the majority of those other States, there’s four types of lien waivers. Um, generally. So, um, these are two general types, a, uh, conditional waiver and an unconditional waiver further broken down into where, uh, when, on the job you use them. So there’s a conditional progress waiver and an unconditional progress waiver, which is obviously used during the middle of the job when the, um, when it’s ongoing and additional payments are going to be expected.
Matt Viator: (52:05)
And there’s conditional and unconditional final waivers, um, that your clients should be, um, strenuously, counseled to only use when they don’t expect any further payment on the job at all. Um, this is extremely important because, um, there’s a lot of statutory, um, protection in that parties are, um, supposed to be able to rely on what a waiver says. So it can be more important what waiver, um, your client delivers can be more important than what actually occurred on the project. If they submit an unconditional final waiver, um, there are no lien rights for them. Um, no matter if they complied with the rest of the statutory requirements and no matter if they didn’t get didn’t get
Speaker 7: (52:55)
Matt Viator: (52:58)
Um, providing waivers without being asked is a good way to build a relationship between a sub and, uh, another contracting party, like a GC or between the GC and the property owner. If you understand, and come at it from a collaborative, um, collaborative viewpoint, that if you’re requesting payment, you understand that once that payment is made, like we’re not going to want to, um, that is a beneficial step to building that relationship and can eventually work to speed up payment made Sophie, um, tell your clients to include a conditional waiver, um, with their invoice or with their pay app. It can result in a significant, um, added value to them in terms of the payment speed coming to them and a conditional waiver. Um, they don’t have to worry about it pro um, negatively affecting them because it’s not, uh, it’s not effective to waive any right to payment or any right to, uh, later file a mechanics lien and less the condition, which is, um, obviously payment is, is met some parties that are more sophisticated may want to require an unconditional waiver.
Matt Viator: (54:17)
This is a little bit overkill, um, in that if a condition, if the, if the condition precedent for the efficacy of a conditional lien waiver has been met, it is perfectly valid and perfectly effective to waive lien rights. But, um, some parties, especially, um, like a developer or a lender, um, want to see the unconditional waiver before they will, um, before they will allow a draw, um, like on a construction loan for, for future, um, payment, they want to make sure that everybody has, um, tied up the waiver of their, um, lien rights, uh, very specifically, so that they can, um, avoid a future lien entanglement. Um, we have a note here that Georgia has an odd rule, um, which is true. I believe we have a Georgia waiver in the materials, but Georgia waivers are all conditional waivers that become unconditional after the passage of time and less, um, a different document is filed.
Matt Viator: (55:25)
Um, as I noted previously, like the, the benefits of waivers, um, apply both to the parties, um, making payment and to the parties, um, wanting to receive payments. So no matter where your client exists on the project chain, um, they need to have an understanding of how lean waivers can be used to promote their interests. So for the parties, again, further up at the top collecting lien waivers is, um, the name of the game, getting a lien waiver from everybody who provided a preliminary notice. That’s another benefit that Matt mentioned earlier too, um, providing a preliminary notice, um, or receiving a preliminary notice is that, you know, who, um, a lien waiver must be collected from, and then for parties further down the chain, providing a lien waiver along with a payment request provided that that lien waiver is a conditional waiver is a great way to speed up payment and understanding when to use which type of waiver.
Matt Viator: (56:33)
So is not to provide an unconditional waiver until payment is actually received, helps protect that, uh, helps protect that party from non-payment because they retain the right to file a mechanics lien later, if they need to do so. I already mentioned that using, using lien waivers appropriately is a way to build trust. This also goes to the content of the waiver itself for parties in States that aren’t one of the 12 States with a statutory form. It’s the wild West. You can do whatever you want with the lien waiver. All it is is, uh, is a, is a contract between two parties waving a certain, right, so you can waive anything. Um, but not trying to shoehorn in language that waves things other than the right to file a lien, um, is always the best practice that you can try to get away with putting some other stuff in there. But when it’s noticed all it does is slow things down and create disputes and, and wear away at the project running, um, in a smooth manner.
Nate Budde: (57:37)
Uh, I’ve got a few bonus docs. We only have a few minutes here, so we’ll blow through them. Uh, and I’ll also mentioned that we’re going to have one more code after those. So stick around. Um, so the first bonus doc is going to be an invoice reminder. Um, an invoice reminder is just a nudge toward payment. It’s, it’s really just a re-up on the, on the invoice you’ve already sent. Um, it’s a good way to kind of just, again, nudge that customer to have them make payment without actually having to go forward with, you know, some kind of legal threat or lean threat. Uh, the next document is going to be a notice of intent to lien. It’s actually required in a handful of States. Um, but notice mint, Dessalines just like, it sounds, you’re letting other parties know I’m unpaid or your client is unpaid, and that they’re willing to file a mechanics lien if they have to, as a bonus tip, actually drafting out that mechanics lien and, um, and presenting it to the, uh, the non, the non-paying party could really help kick them, uh, kick them in the rear and get them to pay up, uh, demand letters.
Nate Budde: (58:34)
Obviously we’re all very familiar with demand letters, but it’s important to make sure they pack the maximum punch on the right hand column. We have, uh, some specific claims that can be helpful to include in demand letters to make sure that payment is made and mailed on time. Um, and that goes a step beyond just the standard, you know, we’re prepared to file suit if we have to. Um, and again, you’ll have these slides, uh, since you used. So you’ll be able to review those later on. And then again, mechanics lanes, we’ve talked about them a lot today. We all understand how they work. The most construction. They’re the most powerful construction payment tool out there. Um, they’re, they’re a low barrier to entry way to force others to make payment. Um, and then those have foreclosed. So this is another document that after mechanics lien is filed, uh, sometimes more sophisticated, um, other parties might, uh, they might call your bluff.
Nate Budde: (59:22)
They might say, we don’t believe that you’re actually gonna enforce this mechanics lien, and they might not be willing to come to the negotiating table. So a notice of intent to foreclose is a noticing, no, really we understand our rights and we’re prepared to execute a lien enforcement if we really have to. Um, and then we want to say, thank you, or we really appreciate you all coming. And the other code is on the screen. Now, if you could send that in, uh, again with your bar number, that would be great. We’d really appreciate it. And we can make sure that everyone gets credit for the CLE. So thank you again for everyone that was attending. Um, if you have questions, uh, feel free to post them in the chat here or post them to Levelsets, uh, community center. And we can answer those questions or other attorneys, uh, other construction attorneys can, uh, help provide some insight.
Kathryn Barona: (01:00:11)
Thank you so much, Matt and Nate, that was a really great presentation. And thank you everyone for joining us today. And I see all the chat right now. So, um, everyone’s sending in their code and their bar numbers. Thank you very much for doing that. Thanks for watching. And, um, you can email me, I wrote it in there and, um, if you have any questions or need any up, and then we will be sending out an email with the recording for this presentation and, um, the slides to, I believe so watch out for that email and we’ll follow up with directions on how you can receive credit, um, because this is certified for Louisiana, but you can probably apply it in your state too. So we’ll have follow-up instructions on that as well. So thank you all. I’ll just leave this here a minute to give everyone a chance to put the cupboard in and, um, otherwise if you already entered it, you’re free to go. Thank you.