Contract tips for the owner

This is the first in a series of articles in which I will discuss various provisions in design and construction agreements. As an attorney representing primarily owners and developers, my comments will be presented from their perspective.

Given the recent passage of the Construction Contracts Act (also known as the Prompt Payment Act), a discussion of the new law is appropriate for this inaugural article.

While, on its face, the CCA appears very far reaching, it has received relatively little fanfare since it became effective last January and, in my experience, has been largely ignored by the real estate industry. However, owners and developers should be aware of the basic provisions of the law in order to ensure that they are fully protected from any negative provisions.

Essentially, the Act establishes payment procedures for construction contracts relating to commercial and large scale residential projects where the cost of the project equals or exceeds $250,000. The Act expressly excludes contracts for the construction of (i) individual 1, 2 or 3 family homes, (ii) a residential tract development of 150 or less 1 or 2 family homes, (iii) a residential project where the aggregate size of the project is 9,000 square feet or less, (iv) any residential project designed for low income households with fewer than 150 units which receives financial assistance from the state or municipality, and (v) any projects resulting from the terrorist attack on the World Trade Center.

In addition to the payment procedures, the Act authorizes remedies for nonpayment, including mandatory interest and the right to suspend work where timely payments are not made. The Act, however, only sets "default standards" so that other than with respect to the remedies of interest and work suspension, the parties can contract freely and provide alternative payment procedures to those set forth in the Act.

Payment Procedures And Remedies

In the absence of an agreement otherwise, contractors may invoice for their work on a monthly basis and render a final invoice after the performance of all contractual obligations. Upon the delivery of an invoice accompanied by all contractually required documentation, an owner is required to approve or disapprove the invoice on a reasonable and good faith basis within 12 business days. If the owner declines to approve the invoice or any portion thereof it must prepare and issue a written statement describing those items in the invoice that are not approved. Among the reasons for disapproval of the invoice, in whole or in part, are unsatisfactory or disputed job progress, defective construction, the failure of a contractor to make payments to subcontractors, the failure to comply with material provisions of the contract, and the failure of the owner's architect to certify approval for these reasons.

The owner may withhold a "reasonable retainage," to be released no later than 30 days after the final approval of work under the contract. The owner may also withhold payment of disputed amounts and amounts reasonable and necessary to cure any defects in the contractor's work or sufficient to cover liquidated damages under the terms of the construction contract.

Unless otherwise provided in the construction contract the payment of an interim or final invoice is due 30 days after approval of the invoice. In the event payment by the owner is contingent upon lender approval, and provided the owner makes timely request for disbursement of the loan, payment is due 7 days after receipt by the owner of funds from its lender, but only in the amount of the funds actually disbursed by the lender. In the event the lender is obligated to disburse funds, but has failed to do so in a timely manner, the time for the owner to make payment is extended until the funds are disbursed.

In the event an interim or final payment is delayed beyond the time period set forth in the Act, the owner is required to pay the contractor interest at the rate of 1% per month on the unpaid balance or at a higher rate if prescribed in the contract. Additionally, if the owner fails timely to approve or pay undisputed invoices, the contractor may suspend performance, after providing the owner with a written 10 day notice and an opportunity to cure. The notice must inform the owner that the payment of the undisputed invoice has not been received and express the intent of the contractor to suspend performance for nonpayment. (A subcontractor intending to suspend performance for nonpayment by a contractor must provide the owner with a copy of the notice.)

In the event a contractor suspends work, it must be provided access to remove its materials and equipment from the project. A contractor who suspends payment is not required to furnish additional labor or materials until the contractor is paid the undisputed amount. Additionally, all scheduled times for the performance of work set forth in the contract are extended for the length of the suspension and, once payment is made, the contractor is entitled to receive the actual costs incurred for remobilization resulting from the suspension, in an amount to be negotiated between the parties.

Suggested Contract Modifications

Inasmuch as the Act only establishes default standards, other than with respect to the payment of interest and the right of a contractor to suspend work for nonpayment, the owner may insert contractual language which varies from the Act. Only if the contract is silent with respect to a particular issue, will the Act apply.

For example, the Act provides that contractor's may render invoices on a monthly basis; however, due to the nature of a particular job less frequent billing may be appropriate. If this is the case, a different billing cycle should be specified. Other examples where the owner may seek to modify provisions of the Act relate to the type of documentation the contractor must submit, the grounds for withholding payment, the amount of monies which may be held and the timing of the release of retainage.

Perhaps the surest way of countering any negative aspects of the Act is the use of a written form of agreement for every construction project. Given the fact that the AIA documents are now available in electric format and can be modified to include owner favorable provisions, I recommend the use of those forms of agreement, with appropriate modifications. The use of the AIA form of agreement, however, does not end the process and the owner should carefully follow the various payment procedures established by the agreement. Particularly, and to avoid the consequence of the suspension of work for nonpayment, the owner should promptly review contract requisitions and, within the time periods required, advise the contractor of the amounts being approved and amounts being withheld. The owner should also make specific provisions in the contract requiring the contractors to make timely payments to subcontractors of all approved amounts in order to avoid the consequences of nonpayment. Adherence to the payment procedures set forth in the agreement will go a long way to insure the orderly completion of the project.

KENNETH M. BLOCK, PARTNER

BROWN RAYSMAN MILLSTEIN FELDER & STEINER LLP

COPYRIGHT 2004 Hagedorn Publication
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