By AIA Contract Documents
January 18, 2023
As a maintenance contractor, getting paid on time is a critical part of your business. It helps you pay your staff and suppliers on time and keep your books in good order. How then do you ensure that you are getting paid in full and getting paid on time? Here are four tips that may help.
(1) Become Familiar with Prompt Payment Acts in your State.
Many states have enacted statutes to help ensure that contractors and their subcontractors get paid on time. These statutes often provide timelines for when payments must be made to contractors and their team. They also provide remedies for contractors who are not paid in accordance with these rules. Sometimes, just showing a client that you are familiar with the laws of your state (and the potential remedies you might pursue) is enough to provoke them into making payments on time.
It is important to note that prompt payment acts are state-specific and may vary greatly amongst different states. These laws also tend to treat public and private projects differently and may only apply to certain types of contractors. For example, Florida’s prompt payment act applies to those who are performing “construction services”, which are defined as “all services performed in connection with the construction, alteration, repair, demolition, reconstruction, or any other improvements to real property that requires a license as a construction contractor or electrical or alarm system contractor…” In other words, make sure to research the laws of your state to understand whether a prompt payment act applies to the kind of services or work you provide.
(2) Charge Interest on Late Payments – and Follow Through
Another way to ensure you get paid on time is to include an “interest on late payments” provision in your maintenance contracts. Charging interest on late payments is often regulated by state-specific usury laws, so it’s best to research the laws of your state before inserting an interest rate into a contract. The following is an example of an “interest on late payments” provision that allows the parties to negotiate an interest rate or, if one is not inserted, the statutory rate.
Payments of amounts due and unpaid by the Client shall bear interest from the date payment is due at the rate below, or in the absence thereof, at the legal rate prevailing at the place where the Maintenance Work is performed.
(Insert rate of interest agreed upon, if any.)
Once you have a provision like this in your contracts, the next step is to use it when appropriate. If a client delays in paying on time, it’s not enough to just have a provision like this in your contract and hope that that alone will stoke them into action. You need to sit down and write a letter (or have an attorney write one for you), explaining that you will charge interest on the payment if it is late. Then, follow through and invoice them for the accrued interest until the issue is resolved. If you show a client that you will not tolerate late payments, you’re more likely to get paid on time.
(3) Don’t Overcomplicate the Payment Process.
Construction contracts tend to have a regimented and somewhat complicated method by which the contractor gets paid. In most construction contracts, the contractor is required to create a schedule of values before the contractor starts its work. This schedule of values allocates the entire contract sum across various portions of the project. Thereafter, at monthly intervals, the contractor submits to the architect an application for payment that describes the work it has performed during the last month, in a manner that is broken down by the schedule of values allocations. The architect then evaluates whether the contractor’s application for payment roughly aligns with what the architect has observed at the site, at which point the architect either approves (in whole or in part) or denies the contractor’s application. Assuming the application is approved, the owner then pays the contractor within a predetermined amount of time.
And while payment on construction contracts is complicated, it’s complicated for a reason. In a construction project, it’s usually difficult for the owner or their lender to understand just by looking at the progress of the work whether they are getting what they are paying for. Thus, the architect acts as a go between to safeguard against the contractor getting too far ahead in payment draws, such that there are insufficient funds at the end of the project to complete the work.
Maintenance contracts, on the other hand, have very few of these complicating factors. Maintenance contracts are typically done through straightforward invoicing, from the maintenance contractor directly to the client, for work that was done in the prior billing cycle. Very rarely is an architect or other design professional brought in to verify or approve the maintenance contractor’s invoice or request for payment. Nonetheless, while maintenance contracts are usually simple and straightforward, there are important items for owners to require in their invoicing protocols. For example, every invoice should at least include a description of the work that is being invoiced and the date ranges for when the work was performed. The client should also require that each invoice be supported by data and documentation that substantiates the contractor’s right to payment. This could include photographs of the work in place or invoices from subcontractors and suppliers. The following is an example of a simplified invoice procedure included in a maintenance contract.
Unless otherwise agreed in a Work Order Contract, the Contractor shall submit to the Client an itemized invoice for services performed and amounts due on the first business day of each month. The Client shall pay amounts due within 30 days after the receipt of an invoice. Invoices shall be supported by data substantiating the Contractor’s right to payment as the Client may reasonably require, such as evidence of payments made to, and releases and waivers of liens from, subcontractors and suppliers. Each invoice shall include (1) the date or date range on which the Maintenance Work was performed, (2) a detailed description of the Maintenance Work performed, and (3) the location where the Maintenance Work was performed. The Contractor shall submit invoices to the Client’s representative identified in each Work Order Contract.
(4) Don’t Waive or Release Lien Rights Until You Have Been Paid.
As a maintenance contractor, your right to claim a lien on a property where you have performed work is an important way ensure that you get paid. Be wary of any request by a client to waive or release liens prior to receiving payment for your work. Liens are regulated by state laws, so always be sure to consult with a local attorney prior to making decisions regarding lien rights. However, a few general tips can be useful to keep in mind. On private projects, only waive or release your rights to liens to the extent that you have been paid. Also, only execute a final release of liens once you have received payment in full. You may be required to release or waive lien rights on public projects; however, make sure that the client has a payment bond in place to protect you against default or failure to pay. The following is an example of a provision that requires the maintenance contractor to release and waive lien rights after final payment has been made.
Upon receipt of a final invoice for any Work Order Contract, the Client may inspect the Maintenance Work to determine whether the Maintenance Work is complete. When the Client finds the Maintenance Work is complete, the Client shall make final payment of all remaining amounts due for the Work Order Contract. As a condition to final payment under any Work Order Contract, the Client may require the Contractor to submit releases and waivers of liens, and other documentation establishing payment or satisfaction of obligations arising out of the Work Order Contract.
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.