September 04, 2018
Author: Martha A. Connolly
Organization: Ernstrom & Dreste, LLP
Agreements Concerning Payment
Payment Applications, Releases and Waivers
Considerations For the Owner
As an Owner, you want to “pay once” and avoid unforeseen claims by Contractors down the road. Effective use of payment applications, releases and waivers can accomplish this goal.
_ Tie payment application to Schedule of Values.
_ Review status of completion of work and compare to Schedule of Values.
_ Require release of liens through date of last payment; lien waivers from all tiers of contractors.
_ Require release of claims through date of payment application, unless claims are already properly noticed under the terms of the agreement.
_ Assure that all lower tier contractors have been paid and no claims are pending or threatened before releasing final payment to the Contractor.
- Protect yourself with an indemnity clause executed by the Contractor at the time of final payment to cover surprise claims asserted by lower tier contractors, which arise after final payment.
Considerations for the Contractor/Subcontractor/Supplier
One of the biggest risks in construction for the contractor/subcontractor/supplier is the risk of non-payment for both base contract work and changes or claims. Contractors should not be required to “fund” a job for the Owner and can reduce this risk through effective use of payment applications, releases and waivers.
_ If no form of payment application is provided by the owner/general contractor, be prepared to offer a form that is acceptable to you.
_ Know the payment application requirements of the contract:
o Pay particular attention to timing; if you miss the submission date you may defer your payment for an additional month.
o Are you required to submit a “pencil copy” of the payment application for approval before submittal of the formal payment application?
o Can you invoice for stored materials? Even if they are stored off site?
_ Know your payment application form:
o Does it require supporting documentation and to what level of detail?
o Does it require “certification” and what risk is associated with such certification?
o Does the payment application contain a lien release?
o Does the payment application contain a broad release of all claims?
o Can you preserve any claims in the payment application or release?
_ Be aware of key differences between clauses in these documents:
o Partial/final payment applications
o Partial/final lien waivers/release
o Interim/final release and waiver of all claims
Rare is the construction project that does not involve change orders. Because a change order impacts the bottom line for both Owners and Contractors, it is important that all parties understand the contractual change order process and how they must react when a change arises on a job.
Considerations For the Owner
_ Draft your Change Order clause so that the rules are clear and then follow those rules to the letter!
_ Control your costs: Draft your Change Order document so that subsequent claims relating to the same change cannot be brought by the Contractor.
_ Be clear about any circumstances under which the Contractor can proceed with the changed work in the absence of an executed Change Order.
Considerations For the Contractor/Subcontractor/Supplier
_ Read the Change Order clause carefully.
o Take special note of notice requirements and timeframes for giving notice of changes; failure to strictly comply can mean waiver.
_ Read the language of the Change Order document carefully.
o May include certification that you have included ALL costs and time related to the change.
_ May preclude later claims for the cumulative impact of excessive numbers of changes (“death by a thousand cuts”).
_ May provide for waiver of ALL other claims not made on the job through the date of the Change Order.
o Strike objectionable language or, better yet, request the Change Order form BEFORE you sign the contract and negotiate the language of the Change Order form.
_ Do not forget to ask for adjustments in the project schedule where appropriate
_ What if you cannot agree on an adjustment in the Contract Price and Project Schedule?
o Can you proceed?
o Can the Owner or Contractor direct you to proceed?
o Will you be paid any amount on the Change Order?
o Is your Change Order now a Claim?
_ Preserve your rights!
Mechanics Liens, Releases and Waivers
Mechanic’s Liens are creatures of statute and thus the rules applicable to the filing, waiver, release and enforcement of mechanic’s liens vary by state. This seminar is focused on New York law, so the information in these materials is based on New York statutory law and is not applicable in other states. It is of utmost importance that you consult an attorney familiar with the mechanic’s lien law of the state in which you are working, if you need to file a mechanic’s lien.
Why file a mechanic’s lien? A mechanic’s lien is a security device intended to protect the unpaid contractor who improves a piece of property and is entitled to be paid for the value of the work performed. As a practical matter, a mechanic’s lien is leverage over the entity that has refused to pay, or is late in payment. Many projects involve complicated financing, including agreements which require those receiving the loan funds to keep a project lien free. The filing of a mechanic’s lien not only puts a lender on notice that there is a problem on the job, but also triggers the financing requirement to address the mechanic’s lien by either paying the claimant or posting a surety bond to discharge the lien.
As a practical matter, filing a mechanic’s lien does not always result in payment, particularly if there is any dispute over the work or the amount claimed due. However, it is a relatively inexpensive way to secure a debt while issues are addressed between the parties.
Mechanic’s Lien Considerations
_ Do you qualify to file a mechanic’s lien?
o Answer depends on numerous factors including:
_ Your role on the job (general/sub/supplier/engineer/architect)
_ Type of job (public/private)
_ Timing (difference between public and private)
_ Status of payments (“due and owing defense”)
_ If you are going to file a lien – do it correctly!
o Know where to file it (key difference between public and private jobs)
o Know how to complete the process
_ You cannot just file a lien and forget about
_ Must also serve the lien on certain parties
_ Must also take steps to continue the lien or enforce the lien before it expires
_ Know what information to include in the lien
_ What to do if someone files a lien against you or your project
o As an Owner or General Contractor when lien is filed against a contractor
_ Is this circumstance addressed in your contract?
_ Hold money?
_ Demand discharge of lien?
_ Pay by joint check?
o Methods of discharging mechanic’s liens
_ Deposit into Court
_ Lien Discharge Bond
_ Attack a defective lien
Considerations for Releases and Waivers
_ Mechanic’s Lien Releases v. Waivers
o Releases related to the discharge of liens
o Releases related to progress or final payments
o Understand that no one can force you to sign an advance lien waiver of your mechanic’s lien rights in New York!
_ Also understand that this is NOT the law in many other states and such provisions are frequently included in contract documents and are enforceable.
Joint Check Agreements
Joint check agreements are common in the construction industry and are frequently used to reduce risks associated with payment. Owners may reserve the right to issue joint checks where a general contractor’s financial stability is questionable and the Owner has concerns about subcontractors and suppliers receiving payments from the general contractor. To minimize the risk of mechanic’s liens and payment bond claims in such situations, and to encourage key subcontractors and suppliers to continue to work on the job, an Owner may retain the right to issue joint checks to the general contractor and its subcontractors or suppliers.
Joint check agreements require consent from the parties involved and cannot be forced upon contractors of any level. As a practical matter, however, if an Owner writes a joint check provision into a contract and refuses to negotiate the terms with the general contractor, execution of the agreement with the Owner is evidence of the general contractor’s agreement to the joint check process.
The proponent of the joint check agreement needs to be careful that it does not assume unintended obligations when it enters into a joint check agreement. Owners and general contractors should be careful to expressly limit the scope of the payment obligation, lest they become liable to the subcontractor or supplier for more all labor and materials supplied to the project.
Similarly, third party recipients of joint check proceeds must guard against unintended waiver of rights to receive full payment, in the event a joint check is tendered for a sum less than the full amount due.