Chapter 15

Payments

Payments

• Payments typically made monthly.

• Retainage typically withheld (5% - 10%)

• Project payment:– series of periodic payments– single final payment (retainage

released)

Project Completion

Major const.work itemscompleted

Punchlistitemsaddressed

Finalcompletionachieved

Projectconsideredsubstantiallycomplete

Punchlistprepared

Finalinspection Release of

retainage

- Owner may begin to occupy the premises.- Warranty for project begins.- Time of completion marked.- Time is marked for filing liens.- Last periodic payment requested.

Payments• Unit price contract:– based on unit prices originally bid.– based on actual quantities measured.

• Lump sum contract:– based on schedule of values (payment

schedule).– based on observation of percentage

completion on each pay item.• Cost-plus contract:– based on actual cost of construction plus

invoices, receipts, and payroll records.

Payment

• A contractor entered a contract in which payment was to be made when the project was complete and “to the satisfaction of the architect”. The contractor did some of the work and requested partial payment. The architect expressed satisfaction with the work done. Payment was denied and the contractor filed suit.

• Q: Is the contractor entitled to payment?

Payment

• Decision:– Payment was justly denied as the

contract stated that the project was to be complete as a condition of payment. Completion of the work was a condition precedent to a right to payment.

British: Richardson v. Mahon (1879) (Building Cases by Morrow - p. 139)

Payment

• A contractor had a contract to install sewer pipe. Tunneling was specified for a portion of the work. Because of the quantity of water in the soil, tunneling was impractical. The contractor suggested a modified approach. The owner rejected the suggestion. The contractor abandoned the contract due to impossibility of performance.

• Q: Is the contractor entitled to payment for the work performed?

Payment

• Decision:– The court ruled that the contractor

could not abandon the contract simply due to difficulty of performance or impossibility of performance. Furthermore, the contractor was not entitled to payment for work performed up to the point of abandonment.

British: McDonald v. Workington Corporation (1892) H.B.C. 222. (Building Cases by Morrow - p. 1)

Payment

• Progress payments on a project were to be made “upon the engineer’s certificate that the work during the preceding month has been done according to the requirements of this contract”. At the end of the third month, the contractor went to the engineer’s office, but found only the assistant engineer. The owner also showed up. The contractor asked for the monthly certificate. The assistant took a typed sheet, signed it, and handed it to the contractor. The contractor passed the …

Payment

• certificate to the owner. The owner said he would pay the following week but failed to do so. Later the owner said the assistant’s approval was not the same as that of the engineer.

• Q: Is the contractor entitled to payment?

Payment

• Decision:–When the assistant’s certificate was

accepted without objection, the owner waived the requirements of the contract.

The Contractor’s Legal Problems by Hayward - p. 152

Payment• On extra work that a subcontractor did for a

general contractor, the sub asked to be reimbursed for the costs of putting shoes on the horses. Relying on a prior case, the sub quoted “coal, feed for horses, and work performed by teams are all claimable” and contended that shoes are like feed. The general contractor quoted another case which held that “supplies are consumed by work and equipment isn’t necessarily consumed but may survive for later jobs”.

• Q: Is the sub to be paid for the horseshoes?

Payment

• Decision:– Horseshoes are like equipment and the

sub must supply them. Shoes may be worn out by the work, but are not consumed by it. Since they might survive for other jobs, no reimbursement is to be made.

268 P. 874

Payment• After a number of changes were made on a

project, the completion date was set at Dec. 1. The project was not completed by that date, but the cont’r continued working and the owner continued to make progress payments. Later, the owner encountered financial problems and terminated the contract in June. The last payment request of $29,000 was not paid. The cont’r sued to receive the $29,000, the $45,000 held in retainage, and the anticipated profit of $35,000.

• Q: Is the contractor entitled to these funds?

Payment

• Decision:– The court ruled that the retainage and

the $29,000 had been earned. The profit was denied the contractor as no convincing case was made that this profit would actually have been realized if the project had gone to completion.

Payment

• When changes were made on a project, a contractor purchased a variety of materials (piping, etc.) from a supplier without establishing the prices beforehand. The contractor and supplier argued over the amount due. Finally, the contractor sent to the supplier a check with the wording “the endorsement of this check constitutes payment in full of all claims”.

• Q: Should the supplier cash the check?

Payment

• Decision:

Until recently, depositing the check would have been regarded as a waiver of a right to make a claim. Since 1980, recipient may deposit such check if endorsed with words such as “notwithstanding the foregoing, supplier accepts this payment without prejudice and with full reservation of its right to assert a claim for

$ . Words such as “without prejudice” or “under protest” are sufficient to permit one to accept a check, cash it, and still pursue a claim.

Note: Jurisdictions may vary. This applies particularly well to the sale of goods; construction is the sale of services.

Owner’s Duty to Pay• A cont’r encountered numerous delays on a

project due to defects in the plans and specs. He made claims for added compensation and time, but was denied some of them. By not receiving the time extension requested, the cont’r was behind schedule. The gov’t then told the cont’r that no further payments would be made until the project was “on schedule”. Progress payments for the previous 2 months were not approved. The cont’r’s progress ground to a halt and 6 months later the contract was terminated.

• Q: Is the contractor entitled to payment?

Owner’s Duty to Pay

• Decision:– The small contractor’s problems

stemmed directly from the non-payment. The gov’t could have considered the contract to have been breached, but this was waived when it insisted on performance. The contractor must be paid for work performed. If the contract is breached, terminate it, but do not coerce by non-payment.

The Engineer’s Role• An engineering firm was hired by a city to

inspect a cont’r’s work on a 16,000 ft. sewer line. The firm was also hired to approve monthly payment requests and check quantities. During construction, payments were authorized for work that had not been done. The cont’r had been overpaid and then became insolvent. In addition, the owner had withheld only $800 in retainage instead of $11,800. The surety stepped in to finish the project. The surety paid all outstanding claims. It then sued the engineering firm.

• Q: Is the engineering firm liable?

The Engineer’s Role

• Decision:– The firm had no contract with the

surety, but it did owe the surety a duty of reasonable care in the exercise of its professional tasks. The engineering firm had to pay $11,000 to the surety.