I hope you all had a great holiday season and were able to connect with family and friends, either in person (socially distanced of course) or virtually. As we close out the books on 2020 and look forward to 2021, let's make a resolution to do our best to get companies paid in a timely manner. This month, as part of a look into the "Construction Alliance" and the "Construction Guidelines", we will explore what we can do to ensure prompt progress payments during the construction process. "Progress Payments", done correctly, will keep the Contractors happy and ensure the work continues in a timely manner.
What are progress payments?
Progress payments are typically monthly and set up by the parties to the construction contract to make periodic payments for completed Work. Each party's payment obligations are defined in the conditions of the contract. The procedure is explained in the Project Manual, Division 01 - General Requirements, usually in consultation with the Owner. The amount of the payment is based on the agreed amount of work completed in the previous month and, in some instances, stored material as identified in the schedule of values.
Who does what?
The Contractor is responsible for putting the schedule of values together and completing the work according to the agreed upon schedule. The Architect/Engineer is responsible for certifying the application for payment by observing in-place construction and verifying the requested payment accurately reflects the completed work. Finally, the Owner really has one job regarding progress payments, and that is to make the payment in a timely manner.
What is the schedule of values?
The schedule of values is a breakdown of costs of the work in proportion to the various scopes of work which total the contract sum. Depending on the complexity of the work, the schedule is normally broken down according to the Project Manual's table of contents, and the subcontractors performing the work. Division 01 may include requirements to indicate specific overhead costs such as mobilization, demobilization, insurance, bonds, etc. beyond individual specification sections. Breakdowns according to trade contracts may simplify on-site evaluation of completion by when a contractor shows up to do the work and when they leave. A larger more complex project may require a more comprehensive schedule by phase, floor, or area whereas a smaller project will require less. Owner's lenders may also have input on how the schedule is broken down.
What is the timeline?
Prior to the first Application for Payment, the Contractor should submit a draft schedule of values to the Owner and Architect/Engineer to verify the proper amount of detail is included. Once that is approved, the Contractor will then submit to the Architect/Engineer a draft Application for Payment on the monthly dates established in the Contract. These dates would ideally coincide with a progress meeting (refer to 2020-12-01 blog "Progress Meetings - The Antidote to Murphy's Law!"), so the Architect/Engineer could observe and evaluate the work in place and discuss any concerns during that meeting. Depending on the Owner and potentially their lender, they may also review the draft at the same time.
Once the Architect/Engineer and Contractor agree on the draft application for payment, the Contractor will make a formal application for payment the A/E to certify. Usually within a set amount of time, three days is typical, and forward to the Owner. In most instances, a percentage of each application is held for retainage, and partial waivers of liens are submitted. These will be discussed in future blogs and are on the "Construction Guidelines" webpage (for those who can't wait). The Owner would then make payment to the Contractor in a timely manner, usually dictated by the Contract. The timeframes may also be determined by federal, state, and local statutes and should be taken into consideration.
After the Contractor receives payment, they will then pay their subcontractors and suppliers.
Can progress payments be withheld?
The simple answer is "yes". The Architect/Engineer may withhold certification of a payment in whole or part for the following reasons:
- Defective work.
- Third party claims.
- Failure of the Contractor to pay subcontractors.
- Repeated failure to carry out the work.
- Other items identified in the General Conditions of the Contract and Agreement.
However, it is imperative that all parties work together to avoid having to take these drastic measures. If you didn't have an opportunity to read last month's post, please take a few minutes to do so. The progress meeting is the ideal time to view in place construction and discuss stored material, either on site or off site in a bonded secure location. It also provides the opportunity to ask questions and resolve differences without making calls or sending e-mails, which no one needs more.
Please make certain to read the guideline "Progress Payments", and if you have any comments, please let me know. Next month join me as we discuss the "Project Closeout".
Till next month…
Steve Gantner RA, CSI, AGCMO, SCIP, CCS, CCCA
Senior Specifier - Conspectus, Inc.