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A201®–2017, General Conditions of the Contract for Construction

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March 27, 2024

In this guide, we’ll explore the essential payment processes in construction contracts, focusing on contractor compensation, retainage, owner financing, and legal rights for non-payment. Whether you’re a contractor or an owner, understanding these terms is critical to ensuring smooth cash flow and preventing disputes during a project. 

Understanding Payment Methods for Contractors 

One of the most crucial aspects of any construction project is determining how and when contractors will be paid. Typically, contractor payments are based on either the percentage of completion of the work or the completion of specific project milestones. 

For projects based on percentage of completion, contractors generally submit payment applications at monthly intervals, detailing the work done during that period. Each payment application is part of the total contract sum. 

For stipulated sum or guaranteed maximum price contracts, contractors usually provide a detailed schedule of values before starting work. This schedule breaks down each item of the project by cost and timeline. Payment applications are updated as work progresses, which helps both the contractor and the owner manage cash flow and monitor project progress. 

If an architect is involved, they will review the payment application and recommend payment amounts to the owner. If no architect is present, the owner or a construction lender typically reviews the application. 

For smaller projects, especially in residential renovations, payment might be based on milestone payments. For example, payments could be due when demolition, framing, or drywall installation is completed. The contractor and owner should agree on a list of these milestones and the corresponding payment amounts before starting work. 

Owner Financing in Construction Contracts 

In some cases, it may be prudent for contractors to request confirmation of the owner’s ability to finance the project, especially if they’ve never worked together before. Standard contract agreements, such as AIA’s A201-2017, allow contractors to request evidence of the owner’s financial capability. If the owner fails to provide this information, the contractor may have the right to delay or even stop work. 

The Role of Retainage in Construction Payments 

Retainage is a percentage of payment withheld by the owner to ensure the contractor completes the project according to the contract. This amount may be released progressively as work continues or after the project’s completion. The contractor and owner should clearly outline the retainage amount and how it will be released in the contract. 

Retainage serves as a safeguard, but it’s essential for the contractor to know exactly how and when it will be paid. Clear definitions in the agreement can prevent disputes regarding payment timing and amounts. 

Rights and Remedies for Non-Payment 

Contractors must be aware of their rights if the owner fails to make payments as agreed. The owner/contractor agreement should outline a specific timeline for payments after the contractor submits an invoice or payment application. It should also state the interest rate on late payments. 

For example, A201-2017 stipulates that if the architect doesn’t issue a certificate for payment within seven days of receiving the contractor’s application, or if the owner fails to pay on time, the contractor may stop work after providing seven days’ notice. The contractor is also entitled to adjust the contract time and sum due to any delays caused by non-payment. 

Moreover, the agreement should specify when non-payment can justify termination. A201 allows contractors to terminate the contract if work is halted for 30 consecutive days because the architect hasn’t issued a payment certificate or the owner hasn’t paid on time. Owners can also terminate if the contractor fails to make payments to subcontractors or suppliers. 

Ensuring Timely Payments and Avoiding Disputes 

A clear agreement on payment terms is crucial for avoiding disputes. Both parties should agree on the method of compensation, payment schedule, milestones, and the handling of retainage. Specific provisions regarding non-payment, payment delays, and termination rights should be included in the contract to protect both parties. 

Payment-related issues are one of the most common causes of disputes in construction projects. To avoid complications, it’s essential that your owner/contractor agreement specifies all terms related to payments, including the method of compensation, payment schedule, milestone payments, retainage, and the procedures for addressing non-payment. Clear terms will not only help ensure timely compensation but also safeguard your rights and prevent costly delays. 

Susan Van Bell, Esq. was Senior Director of Content for AIA Contract Documents for over ten years. She is currently a consultant.

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.