CONSTRUCTION CONTRACT PAYMENT REMEDIES
Getting paid for work performed on a construction project is obviously one of the most important issues for all parties involved in each project. As such, before signing a contract one must review and evaluate the contract. Pay close attention to provisions relating to progress and final payments, retention, withholding payments for defective work, delays, liens or payment bond claims, suspension of work, and termination of the contract. All of those provisions can, in one way or another, affect when and how much you may be paid under your contract.
No less important is the question of the financial ability of the party with whom you are contracting to actually make payment in a timely manner as the work progresses. Contractors should make an appropriate inquiry into the financial worth of the owner/developer and the provisions for the financing of the project. Responsibility of the owner/developer and the general contractor are also important questions for subcontractors and suppliers to consider before entering into contracts.
The challenge in the construction industry, especially in these trying times, is to be paid for your work as it is performed. Delays in receiving payment erode profitability and it can mean disaster if the unpaid amount is large and the delay is long. If you have not been paid for providing work or materials on a construction job, you may have the right to suspend your performance on the job. Your right to suspend your performance may be specifically set forth in your contract; if not, your right to stop work will be determined under general contract law principles. Review your contract carefully to see if it addresses your rights upon nonpayment.
One typical example of contract language allowing an unpaid contractor to suspend performance for nonpayment is found in section 9.7.1 of AIA Document A201-1997. This type of provision is helpful to the contractor because it eliminates an element of uncertainty regarding the consequences of nonpayment. The provision specifically grants the contractor the right to stop work, and gives the owner a reasonable period of time (7 days) within which to cure its nonpayment before the contractor may suspend its performance due to nonpayment.
Most construction contracts permit withholding all or a portion of progress payments for specific reasons such as uncorrected defective work and delays in performance. An example of this provision is in section 9.5.1 of AIA Document A201-1997. Similarly, subcontract agreements typically permit a general contractor to withhold payments from subcontractors to the extent any payment is withheld by the owner for reasons attributable to that subcontractor.
Whether or not a legitimate cause exists for withholding a payment is often a matter of serious dispute between the parties. In the face of such a dispute, refusing to perform further work under the contract as a means for enforcing payment can be risky. If cause exists for withholding a payment, then a refusal to continue performance may be a material breach of the contract.
Care should also be taken not to confuse a “stop work” provision with a “termination” provision. Many contracts contain both and they are intended to address different situations. A “stop work” provision typically allows the contractor to temporarily suspend performance due to nonpayment, but requires the contractor to return to work after payment, if made within a reasonable period. A “termination” provision, on the other hand, allows the contractor to permanently refuse further performance upon the occurrence of stated events. One such stated event may be nonpayment, but a nonpayment giving rise to a right to terminate is usually more serious and longer-lasting than a nonpayment giving rise to a right to temporarily stop work.
If a contractor is going to temporarily cease working on the project because of delayed payment, it is important that the contractor makes it clear that the contractor is suspending work temporarily rather than terminating the contract. An owner who is unable to make payment to a contractor may attempt to characterize the contractor’s action as an improper termination of the contract. By doing so, the owner creates an argument that the contractor has breached the contract.
If the contract or subcontract does not specifically allow the contractor to stop work upon nonpayment, the contractor’s right to suspend performance is governed by general contract law principles. In any event, it is important for contractors to read and understand the provisions in their contract. An experienced construction attorney can answer any questions about the contractor’s rights.