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Construction Financial
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All rights reserved. This
article first appeared in
CFMA Building Profits.
Reprinted with permission.
When a contract contains a 60-day payment cycle and a 2) documentation that substantiates the payment
requirement that lien waivers be submitted with payment requested, which may differ depending on the
applications, statutory provisions like Georgia’s present an contract’s pricing method,
administrative burden on contractors to preserve their lien 3) executed lien waivers and/or claim waivers, and
rights. 4) other documentation evidencing that the requesting
contractor has made, or intends to make, payments to
Other states have different requirements. For example, New all subcontractors and suppliers providing labor, mate-
York’s lien law allows the execution of lien waivers simulta- rials, or equipment for the project. This last item could
neously with or after payment has been made.3 Under Texas include statements of account or affidavits of payment.
law, on the other hand, lien waivers are enforceable only if
they substantially comply with a statutory form4 and only if Contractors seeking payment should know and understand
the claimant has received payment.5 all contractually required documents and include them with
their payment applications. Waiver documents, particularly
Because lien laws and the enforceability of lien waivers vary claim waivers that go beyond simply waiving the contractor’s
from state to state, contractors should have an understand- lien rights to the extent of the payment received, should be
ing of the applicable state law requirements prior to signing carefully reviewed prior to execution. If a contractor has
a contract or starting work on a project. outstanding or potential claims, an unqualified, executed
claim waiver could foreclose any right to pursue those claims
In the absence of a contractual payment cycle (or sometimes in the future. Contractors should accordingly identify and
in lieu of a contractual provision, depending on the appli- reserve any such claims with as much specificity as possible.
cable state law), many jurisdictions have prompt payment
acts that prescribe a time limit for an upstream contracting Documents required for the final payment application typi-
party to make payment to a downstream party. cally include documents necessary for turnover or proj-
ect closeout, such as: 1) as-built drawings, 2) operation
For example, New York’s prompt payment law requires an and maintenance manuals, 3) manufacturers’ warranties or
owner or upstream contractor to approve or disapprove a other warranty documentation, 4) evidence of performance
submitted invoice within 12 days.6 An owner must then pay completion tests, if applicable, and 5) final lien and claim
the invoice no later than 30 days after approval thereof,7 waivers from the contractor and all subcontractors, and con-
and an upstream contractor must pay a subcontractor the sent to final payment from the contractor’s surety. Receipt
funds received from the owner for that subcontractor’s of final payment often acts as a waiver by the contractor of
work within seven days after receipt of the funds from the all claims.
In any case, the contracting parties should agree on the sched- With cost-plus contracts, the owner or upstream contractor
ule of values in order to facilitate the payment process. often has the right to audit the contractor’s records to verify
the amounts and the propriety of costs charged to the job. It
With each payment application, the contractor reviews its is very important for contractors performing cost-plus work
progress and inserts the percentage of each scheduled value to maintain accurate job-cost records, including backup
that has been completed by the end of the pay period. The (payrolls, invoices, evidence of payment, etc.) for audit pur-
sum of these amounts is the amount due to the contractor poses and in case a dispute arises.
for the pay period – less prior payments, retainage, and any
other amounts the owner or upstream contractor is entitled If a contractor overcharges the owner or upstream contractor,
to withhold. The owner or upstream contractor and/or then it is generally responsible for refunding the overpayment,
other party as the contract may allow (such as a consultant, with interest. The parties’ contract may also require the con-
architect, or the project lender), reviews the contractor’s tractor to reimburse the owner or upstream contractor for the
payment application, compares the asserted percentages costs of the audit in that scenario.
complete with its own observations of the contractor’s prog-
ress, and proposes revisions if necessary. Even with an overall cost-plus contract pricing methodology,
contracting parties can avoid common disputes that arise over
For construction contracts under which the architect per- the propriety of various “overhead” or “general conditions”
forms contract administration, the architect is often required charges by agreeing in advance on a lump-sum amount for
to issue a certificate of payment to the owner containing such costs. In that case, a contractor would typically allocate
the architect’s judgment as to the appropriate percentages the agreed lump sum over the expected duration of the proj-
complete and the amounts due. In such contracts, the timing ect and bill a flat rate with each monthly progress payment
of the owner’s payment obligation is often tied to receipt of application.
the architect’s certificate of payment. Disagreements among
the parties regarding the project’s progress can delay a con- Similarly, parties can agree on daily rates to cover such costs
tractor’s receipt of payment or lead an owner or upstream in the event of change orders that extend the duration of
contractor to withhold disputed amounts, so it is important the project. Typically in this scenario, the agreed lump-sum
to quickly and accurately resolve any such issues. amounts would be exempt from audit.
For cost-plus contracts under which the price is based on Another common contract payment methodology provides
the cost of the work plus a markup for the contractor’s profit for payment based on the achievement of milestones identi-
(regardless if there is a guaranteed maximum price), the fied and agreed upon by the parties. Under this method,
required backup for payment applications may be different. there is typically a lump-sum contract price with certain
percentages of the price allocated to the achievement of
While a contractor may still use a schedule of values to various milestones. The contractor is entitled to payment
track the progress of the job, the contractor typically is also upon achievement of each milestone and should submit the
required to submit appropriate evidence of the costs incurred appropriate backup to substantiate that the milestone has
to perform the work, including: been achieved.
Endnotes
LAWRENCE DANY is a Partner at Sutherland Asbill &
1. O.C.G.A. §44-14-366(c), (d) (2009). Brennan LLP in New York, NY. He represents clients in
2. Ibid. §44-14-366(f)(2). complex commercial, construction, financial services,
real estate, and litigation and arbitration.
3. N.Y. Lien Law §34 (McKinney 2014).
4. Tex. Property Code Ann. §53.284 (West 2012). As part of the firm’s Construction Industry Practice Group,
5. See ibid. § 53.281(b)(3) (providing that a conditional lien waiver or release he represents construction managers, GCs, specialty con-
is effective only if evidence of payment to the claimant exists); ibid. tractors, and their surety companies in disputes related
§53.283 (stating that “[a] person may not require a claimant or potential to breach of contract, change orders, schedule delays,
claimant to execute an unconditional waiver and release” unless the lost productivity, mechanics’ lien issues, payment and
claimant has received payment). performance bonds, and insurance.
6. N.Y. Gen. Bus. Law §756-a(2)(a)(i), (ii) (McKinney 2009).
Larry’s practice also involves process safety litigation,
7. Ibid. §756-a(3)(a)(ii). occupational health and safety litigation, and industrial
8. Ibid. §756-a(3)(b)(ii). and construction workplace incident response.
9. FAR §52.233-1(d)(2)(iii).
Phone: 212-389-5038
10. See, e.g., 31 U.S.C. §3729 (2012) (providing for civil penalties for false E-Mail: larry.dany@sutherland.com
claims, treble damages, and the payment of costs). Website: www.sutherland.com
11. See, e.g., Laquila Group, Inc. v. Hunt Const. Group, Inc., 997 N.Y.S.2d
99 (N.Y. Sup. Ct. 2014) (subcontractor argued that unqualified payment
application “became simply an acknowledgment by [plaintiff] of its pay- JESSE LINCOLN is an Associate at Sutherland Asbill &
ment receipt” because the software did not allow the subcontractor to list Brennan LLP in its Atlanta, GA office. He focuses his prac-
reserved claims on the “reverse side” of the form, as the form required). tice on the construction industry and commercial litigation
12. AIA Document A201-2007 §15.1.2. and represents construction industry clients at all levels,
including GCs, subcontractors, and owners.
THOMAS TETHER is the Chief Legal Officer and Jesse has handled disputes involving heavy industrial
General Counsel at Lend Lease Americas, Inc. in New facilities, mixed-use commercial developments, and tech-
York, NY, an international property development and nology projects. He also has extensive construction
construction company. He brings more than 24 years of industry transactional experience, representing owners,
experience and legal expertise in real estate, finance, contractors, and subcontractors as well as preparing and
construction, and corporate law. His involvement with negotiating a variety of contracts.
Lend Lease includes Public-Private Partnerships, develop-
ment, investment management, and project management He is a member of the ABA and the Atlanta Bar
and construction. Association.
Phone: 212-592-6733
E-Mail: michael.serafino@lendlease.com
Website: www.lendlease.com