Chapter 4: Creating and Perfecting the Construction Lien

I.   Overview of the Billing and Payment Process

§4.1   The Construction Lien Act (CLA) operates on principles of notice and self-protection. The documentation the act requires is intended to provide information to those involved with a project who need to preserve lien interests or who need to learn about potential lien interests in the property. The information gives those parties the means to initiate self-protection measures. Moreover, the documentation is designed to work in the context of the typical process by which projects are financed and progress payments are made along chains of contracts. The documentation can accommodate the notice requirements of even those who are not involved with the project, including lenders who are the source of the monthly draws that start the flow of payments along the different layers of project participants.

The logic of the CLA’s notice and documentation requirements is evident when examined in light of the payment procedure followed on many projects. Typically, the construction is financed through a construction loan advanced by a bank or other financial institution. A lender usually secures their interest in the property and their advances of construction funds by a mortgage on the property that is to be the construction site. Since the priority of all later construction liens relates back to the date of the first actual physical improvement to the property or the time that notice is recorded under MCL 570.1107a or .1107b, MCL 570.1119, the lender must have their mortgage interest perfected in the property before construction starts to take priority over later asserted construction liens. The lender also wants assurances of clear title before each progress payment to retain priority. See MCL 570.1119(4). See chapter 3 for a discussion of priority issues.

The owner of the project typically retains the services of an architect or a designer for the project and then contracts with a general contractor or construction manager for construction services. The general contractor or construction manager then contracts with various specialty contractors for the different components of the work. These specialty contractors themselves enter into subcontracts with other contractors and suppliers of materials to be incorporated into the project. Payments on the various contracts are typically made monthly and are based on a percentage of the work completed during the billing period. Therefore, if the contract is for $1 million and 10 percent of the work is completed during a given month, the contractor is allowed to bill for 10 percent of the work ($100,000) in that monthly progress billing, minus whatever retention has been agreed to in the contract. Most construction contracts provide that a percentage of the amount billed during construction, usually between 5 and 10 percent, will be withheld pending the completion of all or a significant portion of the construction. This retention (also known as retainage) is intended to ensure that the contractor will complete the last details of the construction or provide the owner with funds to pay someone else to complete the project.

Subcontractors and suppliers generally submit monthly invoices to the party with whom they have entered into contracts (the party above them in the chain of contracts on the project). Those parties in turn provide invoices for their own materials or services, along with the invoices they have received from parties below them, to the upstream contractor (the next higher party in the chain) or the owner. The construction manager or general contractor ordinarily accumulates the progress billings of all of their subcontractors and suppliers into a single invoice, adds their own billings, and then submits the overall invoice to the owner for payment.

As each set of invoices is submitted up the contracting chain, the party to whom they are submitted usually has the responsibility of ensuring that the percentage billed represents the actual percent completed in the billing period. When the general contractor or construction manager submits their invoice to the owner, either the owner or their design professional also ensures that the overall percentage complete is accurate through a physical inspection of the project during which progress is measured against discrete billing categories. The owner then submits the invoice to the lender.

Note that the owner’s or their agent’s determination of the percentage completed has implications for both the loan arrangement and any payment and performance bonds that have been issued on the project by a surety. For example, overpayment by the owner to the general contractor when the general contractor is the principal on a bond gives the surety a defense to payment up to the amount of the overpayment to the general or construction manager. See §7.35. Therefore, an accurate assessment of what proportion of the project has been completed is essential.

After ensuring that the billing is in order and obtaining all appropriate lien documentation, the lender releases the monthly draw that will start the flow of funds downstream through the contracting chain. Often, the lender engages a title company to certify that the lender’s mortgage is secure by representing that there are no liens on the property. The title company makes this representation by ensuring that appropriate lien waivers have been obtained from those whose work has been incorporated into the property.

II.   Required Documents

§4.2   The CLA calls for a series of documents that operate in the context of most projects to provide both notice of lien interests and a means of self-protection for those involved at various stages in the project. Those principal documents are

1. a notice of commencement (form 4.1),
2. a notice of furnishing (form 4.2),
3. a sworn statement (form 4.3),
4. lien waivers (forms 4.4, 4.5, 4.6, and 4.7), and
5. a claim of lien (form 4.8).

The CLA specifies what information must be in these forms and in some cases provides the format that the form must substantially follow. Each form is discussed in detail in this chapter.

These documents operate in sequence. The notice of commencement is filed first by the owner to give all others involved in the project the information needed to supply subsequent documents (see §§4.3–4.12). Typically, the notice of furnishing is filed next by each subcontractor and supplier who does not have a contract directly with the owner. This notice is intended to identify to the lender and the owner those who may have lien interests in the property (see §4.13). These are the parties from which the owner must obtain lien waivers. Next, the sworn statement is required in connection with each monthly invoice from the general contractor to the owner and from subcontractors to the general contractor (see §4.17). This document provides the owner with information on the progress of payments to the individual contractors, subcontractors, and suppliers, as well as updated information concerning the total amounts of their respective contracts. This document also identifies those from whom partial or total lien waivers are required. Partial conditional lien waivers (form 4.4), which waive liens to the extent of payment, are submitted with each payment application. (While lien waivers are not part of the lien perfection process, they are mentioned here to place the use of those forms in the context of both the payment process and the chronological use of the documents specified in the CLA.) Finally, the claim of lien is filed and recorded by a lien claimant to notify all parties who have an interest in the property that a lien has been claimed on the property (see §4.41).

See §4.62 for a description of the party filing each document, the time limitations for filing, and the entity to which each document must be provided.