A plain-language overview of key protections built into the construction process, and how to make sure you’re covered
Introduction
Construction projects involve many moving parts, multiple trades, layered payments, legal documentation, and people working on your property. Even if you’ve signed a contract and set a budget, there are a few important protections that help minimize risk and keep the project on track. This page explains key contract and payment terms and offers clear steps you can take to protect yourself throughout the process.
Mechanic’s Liens & Lien Waivers
A mechanic’s lien is a legal claim that a contractor, subcontractor, or material supplier can file against your property if they are not paid for their work or materials. Even if you’ve paid your general contractor in full, if that contractor fails to pay a subcontractor or supplier, that unpaid party may have the legal right to place a lien on your home or land.
Once recorded, a lien becomes a cloud on your property title, which can delay refinancing, selling the property, or even finalizing loan disbursements. In some cases, you could even be forced to pay twice if a sub files a lien and the general contractor disappeared with the original payment.
How to Prevent Lien Issues
The best way to protect yourself is to require lien waivers from the general contractor and any major subcontractors or suppliers involved. These are legal documents that waive the right to file a lien for the amount paid.
You’ll typically collect lien waivers with each progress payment, and again when issuing final payment.
Types of Lien Waivers
There are four common types of lien waivers. The difference lies in when the waiver takes effect and whether the payment has already cleared:
- Conditional Partial Waiver
Acknowledges a payment has been issued for part of the project, but the waiver becomes effective only once payment is received and cleared. - Unconditional Partial Waiver
Waives lien rights for a partial payment that has already been received and processed. - Conditional Final Waiver
Applies to the final project payment, but the waiver is only effective once the final payment clears. - Unconditional Final Waiver
Waives all lien rights upon receipt of final payment. This should only be signed after full payment is confirmed.
Your Role as a Project Owner
You aren’t responsible for managing all subcontractors, but you should confirm your general contractor is collecting waivers from everyone involved. If the GC won’t agree to provide waivers or refuses to confirm subcontractor payment, it’s a red flag.
Action Items:
- Ask for lien waivers as part of every payment draw, especially for larger or multi-phase projects.
- Request conditional waivers before issuing payment and require unconditional waivers once payment clears.
- Keep a record of all signed waivers with your project documents. Your lender may also request these.
- Talk to your contractor upfront: Ask how they handle lien releases and how they document payment to subs and suppliers.
Progress Payments vs. Milestone Payments
Construction projects are typically paid in phases rather than all at once. Understanding how your payment schedule is structured and ensuring it’s tied to real progress can reduce risk and give you more control over the timeline and budget.
There are two common ways to structure payments:
Progress Payments (Time-Based)
Progress payments are made on a regular schedule, such as every two weeks or monthly, regardless of what stage the project is at. These are often used on larger or longer-duration projects, especially when the contractor needs cash flow to pay subs and order materials.
Benefits:
- Predictable for budgeting
- Easier for contractors to manage cash flow
- Common on projects with complex or overlapping scopes
Risks:
- You may pay for work before it’s completed
- Delays in progress can still trigger payments unless the contract links payments to deliverables
Milestone Payments (Progress-Based)
Milestone payments are tied to the completion of specific phases of work, like demolition, framing, rough plumbing, drywall, etc. Each milestone must be completed and usually verified before the contractor submits an invoice.
Benefits:
- You’re only paying for work that’s done
- Helps ensure accountability and keeps the project on track
- Easier to align with inspections or approvals
Risks:
- Milestone definitions can be vague without clear documentation
- Contractors may rush to “complete” a milestone to trigger payment
- Disagreements may arise over whether a milestone is truly complete
Which Structure is Better?
Neither method is inherently better, but milestone-based payments offer stronger protection for homeowners and project owners. They ensure you’re not paying ahead of actual progress. For that reason, many banks and construction lenders use a milestone structure for disbursing construction loans.
What to Look For in Your Payment Terms
Action Items:
- Review your contract’s payment schedule. Does it specify dates or milestones?
- If it’s date-based, ask for it to be adjusted or clarified to reflect work progress.
- Make sure each milestone has a clear description. For example:
❌ “Rough-in completed” → ✅ “Plumbing, electrical, and HVAC rough-ins complete and inspected” - Don’t issue payment for a milestone unless the work has been verified as complete.
- Ask whether retention (withholding a small percentage until final completion) is included.
Retainage (Retention)
Retainage is a portion of each payment, commonly 5% to 10%, that is withheld until the end of the project. This protects you by providing leverage to ensure that all punchlist items and final work are completed properly.
Action items:
- Ask your contractor if retainage is included in their payment structure
- If not, you can request to include a retention clause in the contract
- Clarify when retainage will be released and under what conditions (e.g., final walkthrough, lien waivers, punchlist completion)
Substantial Completion vs. Final Completion
These two terms often appear in construction contracts, invoices, and payment schedules, but they mean very different things and can have a big impact on when payments are due, warranties begin, and when you’re legally allowed to use the space.
Substantial Completion
Substantial completion refers to the point in the project when the space is functional, usable, and code-compliant, even if minor details (like trim, touch-ups, or fixture adjustments) still remain.
In many contracts, this is the milestone that:
- Starts the contractor’s warranty clock
- Triggers the release of final loan funds (if applicable)
- Marks when the owner can take possession or begin using the space
For projects like custom homes, ADUs, or commercial tenant improvements, substantial completion is often tied to receiving a Certificate of Occupancy (CO).
Certificate of Occupancy (CO)
A Certificate of Occupancy is issued by the local building department after final inspections have been passed. It confirms that:
- The structure is safe to occupy
- It meets all building, fire, zoning, and accessibility codes
- The permitted scope of work has been completed as approved
You cannot legally move in or open a space to the public without a CO (unless a Temporary CO or equivalent is issued). In residential projects, it’s required for final loan disbursement and sometimes for utility hookups.
Who obtains the CO?
- Your contractor or architect usually schedules the final inspection and submits the paperwork
- You, as the owner, may need to sign off or be present in some jurisdictions
Final Completion
Final completion is the point where every aspect of the project is done, including punchlist items, final clean-up, and any outstanding change orders or adjustments.
This is usually when:
- Final payments (including retainage) are released
- Lien waivers are submitted
- All tools, debris, and materials are removed from the site
Action Items:
- Check your contract to see how substantial and final completion are defined
- Clarify whether the Certificate of Occupancy marks substantial completion for your project
- Don’t release final funds until the punchlist is complete, lien waivers are received, and any required documentation (like the CO) is issued
- If you’re financing the project, ask your lender whether the CO is required to draw the final loan amount
Warranty Periods & Punchlist Process
Even after the contractor finishes construction and you’ve moved in, your project isn’t entirely “done.” Most projects include a warranty period and a punchlist process to catch and fix lingering issues without additional cost.
These protections exist to give you peace of mind and ensure the contractor stands behind their work, but only if you know what to expect and follow up appropriately.
What Is a Punchlist?
A punchlist is a checklist of minor issues or unfinished items identified toward the end of the project. These are typically non-structural and non-code-related items that should be completed, corrected, or improved before final payment.
Examples of common punchlist items:
- Paint touch-ups or scuffs
- Loose hardware (door handles, towel bars)
- Minor plumbing or electrical adjustments
- Missing or chipped trim
- Cabinet alignment issues
- Final debris removal or site clean-up
Punchlist items are typically identified during a walk-through with the contractor just before or at substantial completion.
When to Create the Punchlist
- Before final payment: Ideally, the punchlist is created before you release the final payment or retainage.
- At or after substantial completion: It can happen once the space is usable, even if some minor tasks are left.
- In writing: Use a shared document or checklist so there’s a clear record of what’s agreed to.
Who Fixes the Punchlist Items?
The contractor is responsible for addressing all punchlist items that are part of the contracted scope. They may perform the work themselves or assign it to subs or laborers. Items that go unresolved should be escalated before final payment is made.
What Is a Warranty Period?
Most general contractors offer a warranty period (often 12 months) after the project is substantially complete. This covers defects in workmanship or installation, not normal wear and tear or misuse.
What’s typically covered under warranty:
- Settling cracks in drywall or trim
- Loose tiles, lifting flooring
- Faulty caulking or joints
- Malfunctioning fixtures (if supplied by the contractor)
- Improperly installed hardware or finishes
What’s not usually covered:
- Owner-supplied items (like light fixtures purchased separately)
- Wear and tear or cosmetic blemishes caused by use
- Manufacturer defects in materials (those may be covered by manufacturer warranty instead)
Some states have laws requiring minimum construction warranties. For example:
- States like California require a one-year fit and finish, two years for mechanical systems, and ten years for structural defects.
- Other states may require warranty coverage even if it’s not mentioned in the contract.
Action Items:
- Ask your contractor up front: “Do you offer a warranty? What’s included and for how long?”
- If the warranty isn’t in writing, request to have it added to your contract.
- Schedule a formal walk-through near project completion to create your punchlist.
- Don’t release the final payment until the punchlist is completed to your satisfaction.
- Keep a record of the punchlist, photos of any issues, and final invoice/payment dates.
- Mark your calendar to check in near the end of the warranty period and address anything that arises.
Indemnification & Hold Harmless Clauses
You might come across the terms “indemnify” or “hold harmless” in your construction contract. They sound legal, and they are, but they deal with something very practical: who is responsible if something goes wrong.
What Is Indemnification?
In simple terms, indemnification means one party agrees to protect the other from legal or financial responsibility for certain issues.
Here’s an example:
If a subcontractor accidentally damages a neighbor’s property or injures someone, an indemnification clause might say the contractor is responsible for handling the situation, not you, the owner.
But not all indemnification clauses are written the same way. In some contracts, the wording might shift more risk to the owner than is fair, so it’s worth checking.
What Is a Hold Harmless Clause?
A hold harmless clause is related. It typically means one party agrees not to hold the other legally responsible for specific problems or claims.
It’s common for contractors to include a clause that says the owner will hold them harmless if delays or issues arise due to events outside their control (like weather, permit delays, or owner-caused changes).
What to Look For
These clauses often appear buried in the fine print of standard contract templates. They’re not always easy to understand, but they play a big role in determining who is financially or legally responsible for accidents, errors, or disputes.
Action Item:
- Look for the indemnification or hold harmless section in your contract (often in the “Liability” or “Risk” section).
- Check who is protecting who. The most balanced version will say the contractor agrees to indemnify the owner for claims arising from the contractor’s work or negligence.
- If the clause is unclear or seems one-sided, ask the contractor to explain it or run it by a lawyer before signing.
- You can ask to modify overly broad or unfair language to better reflect shared responsibility.
What’s Next: Navigating Change Orders
As your project moves forward, you may want to adjust the design, swap materials, or deal with something unexpected uncovered during demo. This is where change orders come in. The next page explains how to document and manage changes, how they affect your budget and timeline, and what to do when disagreements come up.
Continue to Navigating Change Orders to understand how changes should be priced, approved, and tracked during construction.