Managing lien waivers with AI 

Lien waivers have become increasingly vital in the construction credit world, as they mark payment throughout a project and track lien rights. With each agreement signed, creditors need to be careful that they are not leaving their company vulnerable to outsized risk by carefully reading the terms of each agreement.

A lien waiver is an agreement to give up your lien rights for a specific portion of a job in exchange for payment for the work done. Waivers have become a hallmark of ongoing construction projects with customers often not paying their debts until a creditor has signed one.

“Lien waivers are almost the gatekeeper to payment on most jobs,” said Alec Papesch, director of strategic partnerships at NCS Credit (Cleveland, OH). “No waiver means no payment. When it’s done correctly, a waiver is a nice running record of what’s been paid and what is still owed, and that clarity helps when jobs go on for months. Waivers can actually protect your leverage and enhance your ability to get paid.”

While it may be tempting to sign these waivers as they cross your desk, there can be hidden language and aggressive terms lurking that put your company at risk. To best control risk exposure when signing away lien rights, it is critical that credit professionals understand the different types of lien waivers and the implications of agreeing to them.

Conditional waiver: A conditional waiver preserves your lien rights until payment clears. “A conditional waiver only becomes effective once the payment is actually received and cleared in the bank,” said Papesch. “If the money never shows up, the waiver that you sign is null and void. You keep all of your rights because that condition is your safety net.”

Unconditional waiver: An unconditional waiver offers creditors less protection, as they surrender their lien rights when signing regardless of whether the payment goes through. “There’s no safety net with this one, you’ve handed over your lien rights and your leverage is basically now the faith of your customer,” said Papesch. “If that check happens to bounce or the wire never lands, then you are out of luck, at least for that portion of the job, and you are now an unsecured creditor back in line with everybody else.”

“The thing that catches even experienced credit managers off guard is that the document may be labeled as conditional or progress, but the actual language within the waiver may be something completely different,” said Papesch. “But should a contract end in a dispute or go to court, they’re not going to care what the title says, they’re going to worry about what the language below it says. This is why you need to carefully read what a contract says, because there are four documents that look nearly identical at first glance but have very different consequences.”

Many waivers are written with dense, complicated language that makes it hard to parse out exactly what terms are being laid out. By incorporating artificial intelligence (AI) into contract review, credit managers can determine with certainty what a lien waiver is asking of them while saving them time that can be used for more difficult credit decisions.

In credit departments already overwhelmed with work, it can be hard to designate the right amount of time for this task. By incorporating AI for contract review, credit managers can quickly scan contracts and determine exactly what they are signing.

“What takes a person who’s relatively focused, maybe a minute per document, AI can do in under a second,” said Papesch. “AI can read the document and pull out the information that you were looking for like the project name, customer, conditional versus unconditional and sort all the information for you. And unlike humans, it doesn’t get tired on waiver number one or waiver number 1,000.”

So much risk lays in a construction credit manager’s ability to determine exactly what they agree to when signing each lien waiver. Reading a contract over and over and obsessing over fine details might not bring as much clarity as AI-powered analysis that alleviates a credit professionals workload.

“Projects are getting bigger, more money is moving through and we’re not adding more people to our teams,” said Papesch. “So, we need technology, and the teams figuring this out are the ones that are growing faster, carrying less overhead and spending less of their day buried in manual busywork.”