In this blog, presented by SunRay Construction Solutions and Stephen D. Marso, Attorney at Law, Whitfield & Eddy, P.L.C., you will learn in detail about three of the contractual payment provisions that you should be aware of in the state of Iowa.
Lessons from Three Contractual Payment Provisions
Different construction projects will have various contractual payment provisions and you will need to pay attention to the provisions that are specific to your construction project. In this blog, we will focus on three key contractual payment provisions and describe key learnings from each of those provisions which you can implement in your projects.
The three provisions that we will discuss in this blog are:
a. Architect Certification
b. Conditional Payment Clauses
c. Payment Claims
The first provision that we will be discussing is in Article 9 of the AIA document. AIA is a standard contract document and the advantage of using a standard document is that everybody is aware of what’s in them as they are used regularly, thus making it easy to work with them.
One constant piece of advice that construction professionals receive is to always read their contracts thoroughly and pay special attention to the payment provisions. You need to be clear about what your rights and obligations are, what are the terms you need to follow, especially while working on public projects where you cannot negotiate the terms. And a key point to remember while working contracts that use AIA is to review the supplemental conditions where the owner can make changes to the standard form.
So, coming back to our first provision which is AIA A201 Section 9.5.1 (2017). This provision states that the architect can withhold the certificate of payment to the contractor. Typically, a contractor submits the pay application to the architect who then reviews it and decides whether to issue a certificate, if yes, then what are the payment obligations of the owner. Based on the provision, the architect can withhold this certificate either fully or partially. A key point to remember here is that the architect’s opinion matters the most.
So, how does this work in practice?
a. There is a discussion between the contractor and the architect about the concerns that the architect may have.
b. Usually, both the parties come to an agreement where both of them agree with the certification.
c. In case neither of the parties come to an agreement based on this provision, the architect has to certify the amount that it believes is owed.
There are eight specific reasons that the architect can use to withhold the certification. The first of those eight reasons are that “the representations to the Owner required by Section 9.4.2 cannot be made.” What this section says is that the architect will evaluate the work and review that the pay application is as per the work progressed. For example, if your pay application says that 50% of a specified area of work is completed but the architect doesn’t think the same, then that percentage will likely get reduced. If the contractor and the architect do not agree to this reduced percentage, then it can form a basis to withhold the certification. Similarly, if the quality of the work is not as per the architect’s satisfaction, then they can withhold the certification on the entire line item.
The remaining seven reasons for withholding the certification include:
a. Defective work not remedied
b. Third party claims filed or reasonable evidence indicating probable filing of such claims, unless security acceptable to the owner is provided by the contractor
c. Failure of the contractor to make the payments properly so subcontractors or suppliers for labor, materials, or equipment
d. Reasonable evidence that the work cannot be completed for the unpaid balance of the contract sum
e. Damage to the owner or a separate contractor
f. Reasonable evidence that the work will not be completed within the contract time, and that the unpaid balance would not be adequate to cover actual or liquidated damages for anticipated delay
g. Repeated failure to carry out the work in accordance with the contract documents.
So, the two key lessons to learn from this contractual payment provision are:
a. The architect has limited ‘power of the purse’ to police the contractor’s performance. So, they use this limited power to ensure that the contractor is performing the work in a timely manner and maintaining quality as well.
b. For contractors, the key lesson to take away is to always do your best to make the architects happy. Make sure that you address any concerns quickly and always remember that the architects are the decision makers on whether you are going to get paid, so do your best to keep them satisfied.
Conditional Payment Clauses
The second provision is the conditional payment clauses, and these are very important for contractors and subcontractors. There are two types of clauses under this – pay-when-paid clause and pay-if-paid clause.
a. Pay-when-paid – This conditional payment clause can be used by contractors to delay payments downstream, such as to the subcontractor, for a reasonable period of time to allow receipt of payment from the upstream which is the owner.
b. Pay-if-paid – This conditional payment clause places the entire risk of non-payment on the subcontractor. So, a contractor can use this clause wherein payment to the subcontractor depends on if the contractor receives the payment from the owner.
So, how do the Courts interpret these clauses? Different states have different laws regarding these conditional payment provisions. Some states have laws which make these provisions void or unenforceable. However, Iowa is not among them. Most of the courts take the position that pay-if-paid clauses are enforceable but disfavored. What this means is that:
a. The conditional payment clause will be considered as pay-if-paid clause only if there is no ambiguity in the language. This means that the language has to clearly state that the entire risk of nonpayment is being shifted downstream.
b. If there is any ambiguity in the language, then the conditional payment clause will be interpreted as pay-when-paid clause.
Here are the keys lessons to learn from the conditional payment provision:
a. If you want to include the pay-if-paid clause, then make sure that your language is clear and unambiguous. Ensure that you explicitly state that the entire risk of upstream nonpayment is being shifted downstream.
b. If you are a contractor, then you must include the pay-if-paid clause in your subcontracts, if you can.
c. If you are a subcontractor, then you do not want the pay-if-paid clause in your contracts with the contractor.
d. As a compromise for the contractors and subcontractors, you can use pay-when-paid clause with clear language that the subcontractor is not entitled to payment of any amount which is being withheld by the owner because of the subcontractor. For example, if the owner is withholding $100,000 of which $50,000 is because of the subcontractor, then contractor can then withhold that $50,000. However, if that $100,000 includes the subcontractors' work but it is not their fault, then the contractor will have to pay the subcontractor.
The final provision that we will discuss in this blog is the payment claims provision. These claims are important, especially for payment disputes for extra work. So, it does not really impact on your regular scope of work but rather the extra work that you may have performed which was not part of your original contract. So, according to AIA A201 Section 15.1.1. (2017), a Claim is not just a demand or assertion for extra money, but also extra time.
So, if you are dealing with liquidated damages or delayed damages by an owner, and you think you are entitled to extra time, then you can make a claim for it. Not many contractors are aware that they can make this claim.
As we mentioned earlier, it is important that you pay attention to supplementary conditions in your contracts because an owner can make changes and these payment claims is one of those areas where the owners often make changes. Now what this provision mainly states are that:
a. The claims can be made either by the owner or the contractor, which means that the owner is also subject to this. So, if the owner believes that they are entitled to damages or some claims against the contractor, then that is subject to these claim provisions.
b. Another important detail to take note of is that the claims should be initiated within 21 days (about 3 weeks) after the occurrence of the even giving rise to this claim or within 21 days (about 3 weeks) after the claimant first recognizes the condition giving rise to the claim, whichever is later.
Typically, this is one of the changes that the owners often make when they reduce the time to 7 days. So, if you fail to meet the deadline, then it can result in your claim being denied.
c. The next point to remember is that the claim has to be sent to the initial decision maker which is usually the architect, along with a copy to the owner. So, if you are a contractor, then your claim should go to the owner and the architect, and if you are the owner, it should go to the architect.
A key point to note is that earlier as per the AIA, the owner had to give a written notice of any claim of liquidated damages. But under the AIA 201, 2017 version, the AIA expressly excluded any owner claim for liquidated damages. This means that as a contractor, you are not entitled to receive any written notice of a claim for liquidated damages from the owner.
So, what are the requirements for sending a written notice?
a. The general notice as per Section 1.6.1 states that the written notice will be deemed as duly served if it is delivered in person by mail, courier, or electronic transmission, if a method for electronic transmission is set forth in the agreement.
b. Section 1.6.2 specifically states that the written notice of claims as per Article 15 of the AIA will be deemed as duly served only if it is sent by certified or registered mail or by courier providing proof of delivery.
It is important that you comply with these requirements so that you don’t give any chance to the other party to deem your claim as invalid. Also, with regards to deadlines, you need to ensure that you submit the written claim notice as per the 21 day (about 3 weeks)-deadline or the court can dismiss your payment claims.
The key lesson to learn from this provision is:
a. As a claimant, ensure that you are following all the contractual claims-related procedures, timelines, deadlines, and other specific requirements.
b. Make sure that your team of staff, contractors, etc., understand this provision so that you can be prepared and send a notice to the owner and the architect stating that you are making a claim for extra money and time. Although you may not be aware of the exact amount, you can provide those details later on as the project progresses.
We hope the information provided in this blog is useful for you and you use the lessons learned in your future construction projects.