Crucial Elements of Payment Clauses in Construction Contracts

By AIA Contract Documents

February 26, 2024

Payment clauses serve as the financial backbone of construction contracts. These clauses delineate the terms under which funds are paid throughout the performance of the work. Clear and thoroughly drafted payment terms set the basis of expectations for the parties. Here are five crucial elements that every construction professional should review when analyzing payment clauses in their contract:

  1. Timing of Payment. The contract should define when the party performing work will get paid. This may include a well-defined payment schedule or a date in which the contractor must submit a payment application to receive timely payment. Where the contract includes a payment schedule, it is typically structured to align with project milestones, such as completion of specific phases or deliverables. Establishing a clear timeline for payments helps maintain cash flow for contractors and subcontractors, mitigating financial strains, and facilitating smooth project progress.
  2. Conditions of Payment. The contract should specify what conditions must be satisfied prior to the party performing work receives payment. This may include details on invoicing procedures that outline what documentation and information must be submitted to receive payment, such as a signed payment application, schedule of values, or lien waivers. The party performing work must adhere to these conditions to receive timely compensation for their work. Similarly, owners or other upstream parties must ensure compliance with contractual obligations to avoid disputes or delays in payment processing.
  3. Retention. The contract should specify whether, and to what extent, retention will be withheld from payment. Retention refers to a portion of the contract price withheld by the owner as security against potential defects or incomplete work. Payment clauses outline the retention percentage and procedures for its release, typically upon satisfactory completion of the project or specific milestones. Parties should pay close attention to retention provisions to gauge potential impacts on their cash flow.
  4. Modifications. The contract should answer how the party performing work will be compensated for changes in the work. Construction projects often encounter changes or variations due to unforeseen circumstances, design modifications, or client requests. Payment clauses should address how such these types of changes impact payment obligations. Modification procedures may necessitate adjustments to the contract price and payment schedule.
  5. Dispute Resolution. Despite careful planning and adherence to contractual terms, disputes may arise regarding payment. The contract should include provisions for resolving such disputes through mediation, arbitration, or litigation. Clear dispute resolution mechanisms help expedite the resolution process and minimize disruptions to project timelines.

Payment clauses play a pivotal role in construction contracts and shape the financial landscape between parties. By understanding these key features, construction professionals may navigate payment provisions with confidence. Effective communication, meticulous documentation, and adherence to contractual obligations are essential for increasing the likelihood of a successful payment processes and fostering mutually beneficial relationships in the construction industry.

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.