Perhaps the most important issue facing those in the construction industry is payment. Complete payment. Timely payment.[i] Projects cannot proceed apace without payment. At the same time, owners and general contractors must be careful not to overpay – which creates a disincentive for proper completion.
The industry has long utilized standard firm contracts and subcontracts. Also, it has accepted procedures for payment requests in the form of certificates for payment and requisition forms. The process of necessity needs clear definition from the outset. When can the contractor seek payment? How does it do so? How long does the other party have to make payment?[ii]
Under the standard percentage of completion approach, the paying party must assess the work. The process does not differ greatly for unit price work where there are often necessary measurements or “time and material” work where detailed submissions are made.
THE REQUEST
The propriety of a request can sometimes run into scope questions. What is contract work? What is arguably outside the scope, additional or extra work, to raise the need for a possible contract modification (a “change order”)? Moreover, since “time is money” when does the project schedule come into play for payment?[iii]
THE AGREEMENT
The foundation for the payment claim is the agreement for the work – perhaps a general contract between an owner and contractor. The subcontractor may find itself layered under that agreement by a subcontract with different terms and/or incorporate the terms of the general contract. Contracts can change. A modification to the contract might be framed as a proposed “change order”.
THE DISPUTE
The typical payment dispute has a contractor squaring off against the owner and seeking payment believed due under the contract. This is sometimes framed as a “collection case” – which is actually a characterization more appropriate to claims of vendors/suppliers. The case be framed as a breach of contract even where the only failing seems to be payment.[iv] Moreover, the loss can go beyond just a balance and it can be hard to delineate between collections and damage claims.[v] Any disagreements or disputes must be properly preserved.[vi] In the end we have “retainage”, simply a carrot to ensure completion as well as to protect against unforeseen issues.[vii]
Of course the contractor must perform the work to become entitled to payment.[viii]
PRESSING FOR PAYMENT.
The contractor must properly seek payment. Payment may be sought based upon the agreement and sometimes on invoices, referred to as “account stated.” Other theories are quantum meruit (reasonable value) and unjust enrichment.[ix]
Security can be obtained by filing a lien or accessing a payment bond. Many of the same elements remain necessary and new ones come into play.
The party seeking payment may seek to recover on a mechanic’s lien or against a bond.[x] It may also identify targets with whom it has no contractual relationship, referred to as “privity.” A key is not to frame a case entirely against one who is “judgment proof.”
FORFEITING POTENTIAL PAYMENT
The contractor must be careful not to forfeit a right to payment. This can occur by letting too much time pass or by affirmatively waiving rights, i.e., a lien waiver. The scope of such a document is usually for work performed to a particular date. The owner at least wishes to put contract time periods behind it on financing. There are many traps for the unwary which can be understandable protective provisions for those seeking to keep control of cost.[xi]
Cash flow can be critical to a contractor remaining profitable and in business. Recouping unanticipated cost can be justified in many instances notice is given and appropriate records are kept. The construction industry is benefitted by those who know their rights and obligations.