PAYMENT TERMS
Presented by Karalynn Cromeens
Managing Partner at The Cromeens Law Firm
Payment Applications
- The thought behind a standard pay application is that at the end of each month, you bill for the percentage of work you've completed, compared to your whole scope.
- The most standard pay application used is the AIA (American Institute of Architects) G703 Form. The G703 form is generally the second page of the pay application, the first page being the AIA G702 Form.
- Once you fill out the G703 form though, the G702 is much easier to fill out, so we will start with the G703!
Column A
- Item number, this should correspond with your scope of work
Column B
Filling out the G703 form
Column C
- The full amount of that value of work.
- For mobilization, Column A would have the number 1, Column B would say mobilization, and Column C would be $10k.
- For site work, Column A would have the number 2; Column B would say site work, and Column C would be $50k.
Let's say this is pay app number 3 on our site work example.
Column D
PREVIOUS pay apps.
- The amount we requested in pay app 1 +
the amount from pay app 2.
G703 cont...
Column E
- The value of the work for THIS pay app.
Column F
- For materials that are being stored on-site that have not been used yet.
- You can only bill the value of these materials once, and they should be included in the full scheduled value.
Column G
- The total of completed and stored materials to date.
- Add Columns D+E+F to equal G.
The next column is the percent your scope is complete:
- (G ÷ C)
- For the mobilization, 100% would go in this column because it is 100% complete.
- For site work, it would be 80%.
G703 cont...
Column H
- The dollar amount to finish that scope of work.
- For mobilization, column H would be zero, because that scope is 100% complete
Column I
- This is the retainage on the amount from column G.
- If the contract requires a 10% retainage, then the mobilization line would have $1,000 in column I.
G703 cont...
Now that you have filled out the G703, the G702 will be easier to fill out!
Line Number 1
- The original subcontract amount that you were hired for. Using our example, we were hired for mobilization at $10k and site work at 50K, so we would put 60k in number 1.
Filling out the G702 form
Line Number 2
- The net change orders.
- This could be a positive or negative number, depending on if there were things added or reduced from your contract amount.
- From our example, we do not have any change orders at this time, so we would put zero in number 2.
Line Number 3
- is number 1 + number 2; this is the total contract sum to date.
G702 cont...
Line Number 4
- The total of column G on the G703 (the total amount of completed work, and stored material to date).
Line Number 5
- The total retainage accrued on the project to date.
Line Number 6
- The total earned to date, less retainage, or line 4 – line 5.
G703 cont...
Line Number 7
- In order to fill in line seven, you will need the pay app from the period before.
- If this is the first pay app, you would put a zero on the line.
- In our example, the pay application before the current one we are working on had 10k for mobilization billed and 30k for site work billed, for a total of 40k less 4k in retainage, meaning on the pervious pay application, line 6 would have been 36k (40k - 4k).
- Therefore, line 7, in our example, would be 36k.
Line Number 8
- This is the current payment due.
- Take line 6 (45k) less line 7 (36k) for 9k. Which equals the amount of work we did for this period - (10k) less retainage of (1k).
G703 cont...
Line Number 9
- The total balance left on the contract, line 3 - line 6.
- In our example, 60k - 45k = 15k. (10k in site work to be completed and 5k in retainage).
Contingent Payment Clauses
- Often, general contractors rely on these payment terms to protect themselves and withhold and/or stall making payments to the subcontractors.
- As a subcontractor, you need to read the payment section of your contract carefully before signing to ensure the payment terms are not stated in a way that will cause you and your business harm.
Pay-when-Paid
Pay-if-Paid
Pay-if-Paid
- The GC is relieved of the obligation to pay the subcontractor if they have not received payment from the owner.
- MEANING: If the GC doesn’t get paid, you don’t get paid! This term is the most dangerous to the subcontractor because if it is found to be enforceable, the risk of non-payment is placed directly on the subcontractor.
- Courts will look for a reason to invalidate these clauses and the contract must contain very specific language to uphold a pay-if-paid clause.
Pay-when-Paid
- This contingent payment term usually contains language that allows the general contractor to withhold payment to subcontractors until they have received payment from the owner.
- It could affect the timing of payment from the general contractor to the subcontractor.
- This clause is more common than the pay-if-paid clause.
Parts of the Subcontract that can affect your payment
- Project Scope:
- It is imperative to make sure that the scope described is an accurate description of the work you are offering to perform for the price contained in the payment section. If you see that the scope of work is more than what you bid, the time to negotiate is before you sign the contract, not after!
- Dispute Resolution:
- Most of these provisions contain an arbitration clause, which requires the parties to submit to arbitrations instead of resolving disputes in courts of law.
- These provisions could end up costing the subcontractor substantial amounts of money to pursue a payment that is owed to them.
- If you see a dispute resolution section mentioning arbitration in your contract, it is best to try and negotiate that out of the agreement, or at the very least, settle for mediation or another less costly alternative to arbitration.
Have you ever not received payment after completing the work?
Unfortunately, the answer for many of you is probably yes. The good thing is, in Texas, there are laws that are meant to protect you and allow you to collect payment on jobs you have completed!
- To do so the subcontractor needs to follow the steps in the Prompt Payment Act.
The Prompt Payment Act
What do you do if you’re owed payment on a Private Project?
- Under the Prompt Payment Act:
- Once an owner receives a request for payment, the contractor has a right to be paid within thirty-five (35) days
- The subcontractor is entitled to payment within seven (7) days of the contractor’s receipt of payment
- If you have not received payment after the above dates - You need to send a demand letter stating your payment is overdue.
- A contractor can provide a ten (10) day notice to suspend work for non-payment. After the ten (10) day notice, the contractor does not have to return to work until they are paid for the unpaid balance and the costs for demobilization and remobilization
- The contractor/subcontractor may be entitled to interest after the thirty-sixth (36) day
- If you still have not received payment after the owner or GC has received your demand letter
- You will need to file a lien on the property
- Payment must be made by the thirty-first (31st) day after the later of the following:
- (1) the date goods are received under the contract
- (2) the date services called for under the contract are completed
- (3) the date the invoice is presented to the governmental entity
- A contractor is required to make payment to its subcontractors no later than the tenth (10th) day after the contractor’s receipt of payment
What do you do if you’re owed payment on a Public Works Project?
In the Prompt Payment Act, it allows for you to include interest after the 36th day of past due payment, as well as include costs for demobilization and remobilizations.
These costs can be calculated by:
- Interest begins to accrue on the day after the date on which the payment becomes due, at the rate of 1.5% each month.
- Demobilization Costs could mean all costs and expenses incurred for the suspending or termination of work, including as applicable, travel expenses, penalties, fees and other costs associated with terminating, suspending, or making change orders to contracts.
- Remobilization occurs when a construction business must undertake additional mobilization activities after initial mobilization has already taken place.
Calculate past due interest, demobilization, and remobilization