Working with Contractors in Michigan: Contracts, Permits, and Lien Waivers

Learn how Michigan real estate investors manage contractors, set payment milestones, navigate permits, and use lien waivers to protect renovation projects.

Working with Contractors: 

Contracts, Payment Milestones, and Lien Waivers

Taking on a renovation project is one of the most exciting ways to build value in real estate. Whether you are updating a two-family flat in Detroit, refreshing a single-family home in Warren, or turning around a rental in Royal Oak, a successful rehab can turn a modest property into a profitable asset.

However, even the best deal on paper can lose money if a renovation runs over budget or off schedule. Many real estate investors learn the hard way that managing the physical transformation of a property is just as important as running the financial numbers.

Protecting your investment capital requires a clear business framework. By setting up solid contracts, enforcing sensible payment schedules, obtaining proper municipal permits, and securing legal protections like sworn statements and lien waivers, you can manage your projects smoothly and keep your investment safe.

The Written Contract: Your Primary Shield

A handshake deal might feel friendly, but it leaves far too much room for misunderstanding. A detailed, written contractor agreement is the single most effective tool you have to align expectations before work begins.

In Michigan, under the state Occupational Code, residential builders and specialized maintenance and alteration contractors must be licensed by the state for any project valued at $600 or more (including labor and materials). Always verify that your contractor holds an active license through the Michigan Department of Licensing and Regulatory Affairs (LARA) database before signing any agreement.

Crafting a Clear Scope of Work

The core of any good renovation contract is the scope of work. A vague scope, such as "remodel second-floor bathroom," invites confusion and unexpected costs later.

Instead, your scope of work should be explicit about materials, quantities, and expectations. Specify the exact type of flooring, fixture models, tile coverage areas, and paint colors. When every detail is written down, both you and your contractor share the exact same definition of a completed job.

Choosing the Right Pricing Structure

Most investor renovation contracts fall into one of two pricing structures:

• Fixed-Price (Lump Sum) Contracts: The contractor agrees to complete the defined scope of work for a set, total price. This provides predictable budgeting for investors, as the contractor absorbs the cost of minor price fluctuations in materials or labor.

• Cost-Plus Contracts: You pay for the actual cost of materials and labor, plus an agreed-upon percentage fee for contractor management. While this offers transparency, it requires strict tracking of receipts and leaves your budget open to cost overruns.

Payment Milestones and Draw Schedules

One of the quickest ways to lose control of a renovation is to hand over too much money before work is completed. A properly structured payment schedule keeps the project moving forward while protecting your capital.

Structuring Safe Payment Draws

Divide the total contract price into specific payment draws tied directly to completed milestones, rather than arbitrary dates on a calendar.

A healthy payment schedule usually begins with an initial deposit to cover specialized material orders or permit applications. This deposit should generally be modest, often between 10% and 20% of the total budget.

Subsequent payments should only be released as specific phases pass inspection:

• Deposit: Paid upon signing the contract to cover initial permits and early materials.

• Draw 1: Released after rough trades (plumbing, electrical, and HVAC framing) pass city inspection.

• Draw 2: Released after drywall installation, taping, and prime painting are finished.

• Draw 3: Released after finish trades (flooring, cabinets, and tile work) are installed.

• Final Draw: Released only after the final walkthrough is complete, municipal approvals are granted, and all statutory sworn statements and final lien waivers are signed.

Holding Retainage

Consider holding back 10% of each milestone payment as retainage. Retainage is a standard practice in construction that ensures the contractor returns to complete small finish-list items, often called punch list items, at the very end of the project.

Navigating Michigan Construction Lien Law

Many real estate investors are surprised to learn that they can be forced to pay twice for the same work if they do not follow statutory payment procedures.

Under the Michigan Construction Lien Act (MCL 570.1101), subcontractors, material suppliers, and laborers have a legal right to file a lien against your property title if they are not paid by the general contractor. Even if you paid your general contractor in full, unpaid subcontractors can place a claim on your property, which can prevent you from selling or refinancing.

The Role of Sworn Statements (MCL 570.1110)

To protect property owners from hidden subcontractor claims, Michigan law requires general contractors to submit a notarized Sworn Statement whenever payment is due or requested.

A Sworn Statement lists every subcontractor, material supplier, and laborer working on the job, alongside their total contract amount, payments made to date, and current balance owed. Requiring a notarized Sworn Statement with every draw request gives you total transparency into who is working on your property and how much they are owed.

What Is a Lien Waiver?

A lien waiver is a formal legal receipt signed by a contractor, subcontractor, or supplier. By signing it, they confirm they have received payment for a specific portion of work and give up their legal right to file a lien against your property for that amount.

You should collect lien waivers corresponding directly to the names listed on the general contractor's Sworn Statement at every major stage of the renovation:

• Partial Conditional Lien Waiver: Signed by the contractor before receiving a specific draw, stating that the waiver becomes effective once the payment check clears.

• Partial Unconditional Lien Waiver: Signed after the payment check clears, confirming receipt of funds for that specific phase of work.

• Final Unconditional Lien Waiver: Signed at the very end of the project by the general contractor and all subcontractors listed on the Sworn Statement, confirming that all obligations have been paid in full.

Recording a Notice of Commencement

Before work begins, property owners in Michigan should record a Notice of Commencement with the county Register of Deeds and post a copy at the job site. This official document alerts potential subcontractors of the project details and requires them to formally submit a Notice of Furnishing within 20 days if they intend to preserve their lien rights, giving you a complete paper trail.

Never release a new payment draw until you have cross-referenced the general contractor's Sworn Statement and collected unconditional lien waivers for the previous draw from all listed sub-trades.

Navigating Municipal Permits and Inspections

Taking shortcuts on municipal permits might seem like a quick way to save time and money, but skipping them creates serious financial and legal risks.

Who Should Pull the Permit?

In Metro Detroit, municipal building departments require official permits for structural work, electrical updates, plumbing changes, and HVAC installations.

Always require your licensed contractor to pull the permits under their own company name. If a contractor asks you to pull an owner-builder permit for an investment property, treat it as a warning sign. When a contractor pulls the permit, they accept formal accountability to the city for ensuring the work meets current building codes.

The True Cost of Unpermitted Work

Skipping permits can stall your investment strategy in several ways:

• Stop-Work Orders: City inspectors who spot unpermitted activity can issue stop-work orders, which pause construction and often carry costly penalty fees.

• Compliance Delays: In cities like Detroit, rental properties must hold a Certificate of Compliance before you can legally collect rent. Unpermitted electrical or structural work will fail city inspections, delaying tenant occupancy.

• Insurance Risks: If an unpermitted electrical modification causes a fire, your insurance company may deny the resulting claim.

Common Misconceptions

Misconception 1: "A verbal agreement is fine if I trust the contractor."

Verbal agreements lead to miscommunication when unexpected issues arise. Having a detailed, written contract protects both you and the contractor by creating clear, written reference points for every decision.

Misconception 2: "If I pay my main contractor, I am protected from subcontractor liens."

Paying the general contractor does not automatically protect your property. Under Michigan law, unless you receive a notarized Sworn Statement and matching lien waivers, an unpaid subcontractor can still place a construction lien against your real estate.

Potential Mistakes to Avoid

• Paying Large Sums Upfront: Never pay a contractor for work that has not been performed yet. Keep cash reserves in your control until milestones are verified.

• Skipping Written Change Orders: Unforeseen repairs happen during renovations. Any change to the original scope, cost, or timeline must be documented in a written change order signed by both parties before the extra work begins.

• Failing to Verify Insurance: Request an official certificate of insurance directly from your contractor's insurance agent before work starts. Ensure they carry both general liability coverage and workers' compensation insurance.

Real-World Example: Protecting Your Project

Consider an investor who purchases a single-family fixer-upper in Metro Detroit.

The investor hires a licensed builder to complete a $40,000 renovation. Instead of handing over $20,000 upfront, the investor sets up a contract with four $10,000 payment draws tied to specific inspection milestones. The agreement clearly states that the contractor must pull all municipal plumbing and electrical permits.

During drywall removal, the contractor discovers outdated wiring that must be replaced. Because the contract requires written change orders, the contractor submits an itemized quote of $2,500 for the extra work. Both parties sign the change order, updating the timeline and budget cleanly.

At each milestone, the investor reviews the completed work, verifies passed city inspections, inspects the contractor's notarized Sworn Statement, and collects signed partial lien waivers before writing the next check. When the project wraps up, the investor receives final unconditional lien waivers and an official city sign-off. The renovation finishes on budget, and the property is ready for a qualified tenant without any legal or compliance issues.

Frequently Asked Questions

How do I check if a contractor is licensed in Michigan?

You can search the state database through the Michigan Department of Licensing and Regulatory Affairs website. Look up the individual or business name to verify that their license is active and free of formal enforcement actions.

What should I do if a contractor falls far behind schedule?

Your contract should include estimated start and completion dates, along with a clause explaining how delays are handled. Start by reviewing the timeline with your contractor in writing. If delays continue without a valid reason, your contract should define the steps for default and termination.

Key Takeaways

• Verify that your contractor carries an active Michigan Residential Builder or M&A license for any project over $600.

• Create a detailed scope of work that lists specific materials, quantities, and layout details.

• Tie payment draws strictly to completed milestones and passed municipal inspections rather than dates on a calendar.

• Require a notarized Sworn Statement (MCL 570.1110) and matching lien waivers with every payment draw to protect your property title.

• Require licensed contractors to pull municipal permits under their own name to ensure work meets local building codes.

Conclusion

Managing contractors successfully relies on clear communication, structured processes, and proper paperwork. By setting up detailed scopes of work, enforcing milestone payments, collecting statutory sworn statements and lien waivers, and pulling official permits, you can protect your financial capital and keep your project on track. Developing strong habits around contractor management helps you eliminate unnecessary stress, preserve your profit margins, and build a lasting real estate portfolio across Metro Detroit with confidence.