It’s been 45 days, you’ve completed the work and you haven’t received final payment. Now you find out your contract included a paid-when-paid provision you didn’t notice. Sound familiar? You are not alone.
Let’s identify some of the most significant contract clauses to watch out for when reviewing your prospective subcontract agreement. By taking the time to understand and negotiate these danger clauses, it also paves the way for a greater understanding of the shifting risks toward the subcontractor.
1. Scope of Work
Beware, you may have agreed to an implied provision in the subcontract agreement obligating you to furnish all items required for the performance of the work. Review of the plans and specifications during the bidding process may not raise issues of additional work until it’s too late.
For example, you are asked to provide additional labor and materials that were not on your bid specifications. To avoid any disputes due to ambiguous descriptions, limit your scope of work to the plans and specifications as identified in your subcontract agreement. Insist on a clear description of the project overview, scope and deliverables.
2. Substantial Completion
This is the most anticipated milestone of the project schedule and a time for celebration! However, its arrival sets the stage for an environment rich with ambiguities: vested parties have conflicting priorities; the owner may want to delay substantial completion to defer payment obligations or commencement of the warranty period; the contractor desires the exact opposite.
According to AIA document A201, Section 9.8.1, substantial completion is “the stage in the progress of the Work where the Work or designated portion is sufficiently complete in accordance with the Contract Documents so that the Owner can occupy or utilize the Work for its intended use.” Accordingly, the Certificate of Substantial Completion should be considered as the most important construction document. It basically removes the owner’s leverage to assess liquidated damages, withhold large sums of money, etc.
A cavalier review of the punch list and a random signature may not hold up in court if there’s a turn for the worst. Require that you are issued a Certificate of Substantial Completion in accordance with that milestone of the project. Insist terms are clearly defined in the contract documents as to what work is required to be considered “substantially completed.”
Contrary to popular belief, retention should not be the owner’s contingent financing to complete the project. The purpose of the retention provision is to maintain the subcontractor’s interest in completing the project. Generally retainage is calculated at five to ten percent of each progress payment and paid to the subcontractor as part of final payment of the contract price.
Typically the problem arises when these payments are delayed and can be minimized with clear definitions of timelines, acceptance of completed work and substantial completion. Require that your subcontract agreement is not only in compliance with your states regulations pertaining to the retention amount, timing of payment, imposition of interest, but also provides for issuance of a Certificate of Substantial Completion.
4. Contingent Payment Clauses
One of the most problematic contract clauses is the contingent payment provision. It drives right into your pocket and can have a disastrous effect on your cash flow. The subcontractor is often faced with the decision to either accept the provision or not take the job.
The general contractor has the right to exercise the lien law. A subcontractor is generally not protected with the right to file a lien.
Paid-when-paid: Here the subcontractor will not be paid until the general contractor receives payment. However, if the general contractor never receives payment, the subcontractor should retain the right to be paid in a reasonable amount of time. You should negotiate to insert language that limits the amount of time available to the contractor before he has to exercise his obligation to pay regardless of whether the contractor gets paid or not.
Paid-if-paid: This clause is unacceptable because it shifts the entire risk of non-payment to the subcontractor with no assurance of payment at all. Have it removed from the agreement in its entirety or negotiate for the lesser of the two evils: a pay-when-paid provision. If you do the work, you should be paid.