By AIA Contract Documents
August 9, 2023
In these times, when there seems to be plenty of work for contractors of all tiers, it’s tempting to build big backlogs to carry your firm through any future downturns. But before you bid on your next project, or even in regard to a current contract, it’s a good time to assess (or re-assess) your contract payment stipulations.
Here’s the top five best practices to ensure you receive timely payments on both prospective and existing projects.
Table of contents:
While this sounds almost too basic to state, contractors should have a complete understanding of their contract. It’s amazing how many ‘surprises’ in contracts result in delayed payments or lost opportunities. Read your payment provisions. If you’re still in contract negotiations, go through the details and make sure all parties are on the same page about what constitutes proper performance of the contract obligations.
For example, ensure that you have a complete understanding of what documents and information must be submitted for payment applications. We have seen disagreements arise where owners expect to receive a certain set of documents from the general contractor, such as sworn statements and lien waivers from each subcontractor, but the contract terms were so unclear that the parties had differing interpretations of what documents and information was required to be furnished as part of a complete payment application.
Know what information you have to gather internally and from your project partners to properly complete and submit a payment application and note the associated timeline. Timeliness might mean a monthly submission, a certain percentage of the work completed, or some combination thereof. Make sure you and all other parties are on the same page about the necessary documents to submit, and when such submission is due. AIA Payment Application, G702-1992 provide convenient and complete forms on which the contractor can apply for payment and the architect can certify that payment is due.
When it comes to preserving lien rights, contractors of all tiers should know the types of required documents and notices that must be issued in accordance with the contract and governing law. Even though the contract may not specify each and every required notice, governing law may require contractors to issue notices immediately before or after starting, or completing, work on the project. Contractors may unknowingly waive their lien rights by not submitting required notices or paperwork by these hard deadlines.
For instance, many states require contractors to provide a notice of furnishing of work to the owner within a designated timeframe after starting work on the project. Failure to submit this statutorily required notice within such a timeframe may result in a waiver of the contractor’s lien rights.
Further, the contract, or governing law, may require contractors to submit notice of a claim for nonpayment within so many days of completing a project. But what does ‘completion’ mean? Is it when you physically leave the site, when you submit the last payment application, or some other requirement? It is important to know what’s expected! Learn more about lien waivers here: The Basics of Waivers and Releases of Lien or Payment Bond Rights.
As appropriate, it is wise to obtain a copy of the surety bond for your project before beginning work. The terms of the surety bond will often have specific requirements for asserting a claim for nonpayment under the payment bond. If you miss the specified dates, you may have lost your opportunity to submit a viable claim under that bond. Become familiar with Surety Bonds and what is required from the surety, contractor and owner.
Know when you should get paid, particularly on a public project, where there might be more than one relevant payment statute. Most contractors are familiar with prompt payment statutes that require the upstream contractor to pay their subcontractors within a designated timeframe of receiving payment from the owner. Are you tracking those dates? Have other trade contractors been paid? If you haven’t been paid by the date required under law, it is good practice to have previously prepared written notices to issue to all necessary parties demanding payment. This way, you may avoid issues, or unnecessary close calls, stemming from the timeliness of these notices.
Research the general contractor or owner in advance of bidding on a project. Knowing a general contractor’s history of payment goes a long way to reducing the risk of late payments. Has the general contractor declared bankruptcy in recent years, or been sued by subcontractors for nonpayment in the past? Do your due diligence about future partners so that you can make a wise choice as to who you conduct business with.
These five best practices related to timely payment are relevant in any market condition.
Despite workforce shortages and supply chain challenges, your firm likely has plenty of options for the type of work to bid on—be selective and exercise care in picking your future partners to ensure that you are paid in the timeliest manner possible.
AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.