Contract documents

October 31, 2023

Construction projects, whether large or small, are complex undertakings that involve multiple stakeholders, substantial financial investments, and a myriad of contractual obligations. One of the most common challenges faced in the construction industry is payment disputes. These disputes can arise due to various reasons, such as delays, defects, scope changes, or disagreements over contract terms. In this article, we will explore the common causes of payment disputes in construction contracts and the mechanisms in place to resolve them.

Common Causes of Payment Disputes

• Scope Changes: Construction projects are often subject to scope changes due to unforeseen conditions, design modifications, or owner requests. Disputes can arise when parties differ on the valuation of these changes.
• Delays: Time is money in construction, and project delays can lead to disputes over additional costs incurred as a result of extended construction periods.
• Defects and Quality Issues: Disputes can also emerge when there are disagreements about the quality of work performed, adherence to specifications, or the need for rework to rectify defects.
• Payment Timing: Disagreements over when and how payments should be made, including milestone payments, can cause conflicts between parties.
• Non-Payment: Sometimes, owners or contractors refuse to make payments as agreed upon in the contract, leading to disputes over unpaid invoices.

Mechanisms for Resolving Payment Disputes

• Contractual Provisions: The first line of defense against payment disputes is a well-drafted construction contract. Contracts should include clear and detailed payment terms, including schedules, milestones, and methods of calculation. They should also address dispute resolution procedures.
• Negotiation: In many cases, parties can resolve payment disputes through negotiation and discussion. This informal approach allows for open communication and can lead to mutually agreeable solutions.
• Mediation: When negotiation fails, mediation is a common next step. A neutral third party, the mediator, facilitates discussions between the parties and helps them reach a resolution. Mediation is non-binding, meaning that the parties are not obligated to accept the mediator’s recommendations.
• Arbitration: Arbitration is another popular method for resolving payment disputes. It is a more formal process than mediation and typically results in a binding decision. An arbitrator, who is often an experienced construction professional or lawyer, hears evidence and arguments from both sides and renders a decision.
• Litigation: If all else fails, parties may resort to litigation, which involves taking the dispute to court. Litigation can be time-consuming and costly, but it may be necessary when other mechanisms do not lead to a satisfactory resolution.
• Pay-if-Paid and Pay-when-Paid Clauses: Construction contracts often contain clauses that address the timing of payments. “Pay-when-paid” clauses indicate that the subcontractor will be paid when the general contractor is paid by the owner. “Pay-if-paid” clauses stipulate that the subcontractor will only be paid if the general contractor is paid by the owner. The enforceability of these clauses varies by jurisdiction.
• Mechanic’s Liens: A mechanic’s lien allows contractors and subcontractors to secure a claim against the property they have worked on. If payment is not made, the property can be sold to satisfy the debt. This mechanism encourages payment and can be an effective tool for resolving disputes.

Conclusion

Payment disputes in construction contracts are common but can be mitigated through proactive contract management and dispute resolution mechanisms. Clear and detailed contracts, open communication, and a willingness to negotiate are the first steps in avoiding disputes. When disputes do arise, various mechanisms, including mediation, arbitration, and litigation, can be employed to reach a resolution. It is essential for all parties involved in construction projects to be well-informed about the terms of their contracts and the available mechanisms for resolving disputes to ensure the success and timely completion of projects.

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.