Disclaimer: This publication does not contain legal advice. The discussion is intended to provide information and guidan
White Paper on Progress Payments
Published by American Subcontractors Association, Inc. Foundation of the American Subcontractors Association, Inc. 1004 Duke Street Alexandria VA 22314-3588 (703) 684-3450
[email protected] www.ASAonline.com
Copyright © 2017 by the American Subcontractors Association, Inc. and the Foundation of the American Subcontractors Association, Inc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of the American Subcontractors Association, Inc. Disclaimer: This publication does not contain legal advice. The discussion is intended to provide information and guidance to individual subcontractors. Specific circumstances vary widely, so subcontractors may need to consult their attorneys before acting on the premises described herein. Each subcontractor should decide for itself the contract terms and conditions which it believes will best protect its interests. Subcontractors should not agree among themselves as to the form of contract terms and conditions they will use. Such agreements may violate federal or state antitrust laws and could result in the imposition of civil and/or criminal penalties.
White Paper on Progress Payments Introduction An essential part of any credit relationship is trust. As a whole, subcontractors are well versed in the language of trust since they are, by the very nature of their businesses, creditors. Subcontractors trust in the promise of timely future payments when they mobilize their workforces, purchase supplies and commence work before being paid. Usually, subcontractors and their customers declare their trust and obligations to each other through a written document—the subcontract agreement. Acting on the basis of trust, subcontractors typically accept financial arrangements of scheduled progress payments to provide the funds to pay their employees, suppliers and subsubcontractors, and fund other essential business functions. Experienced subcontractors know that, from time to time, the trust and obligations of one party or the other will be broken. Since a late progress payment impacts a subcontractor’s cash flow, most subcontractors have learned to plan for the contingency of late or partial payments for work that has been properly performed. While any delay creates a difficult cash flow position, there also is a matter of degree. Some customers will miss the due date in the rarest circumstances. Others are chronic late payers. Then there’s everyone in-between. How can a prudent subcontractor protect itself from the potentially devastating effects of late progress payments? First, a subcontractor should consider establishing a date certain for payment in the subcontract. A subcontractor may wish to condition its bids on an unambiguous schedule for payment applications and receipt of progress payments. Second, a subcontractor should recognize that, as a responsible creditor, it must hold up its end of the bargain under the rules to which it agreed. Too many payments are delayed because the subcontractor submitted an improper or late invoice. No matter how bad the situation is, it never helps to be the one who submitted the wrong paperwork. Third, a subcontractor should be aware that there are a variety of collections tools at its disposal. For example, establishing the contractual right to suspend work can be an effective tool to force the issue of late payments to be addressed. Consider incorporating penalties for late payments, including interest, de- and re-mobilization costs, as well as the ability to recover attorney fees during a dispute. A trust fund provision in the subcontract could say that moneys received by a contractor for work done by the subcontractor are to be held in trust for payment to the subcontractor. Many widely recognized contract documents, including those in the ASA Subcontract Documents Suite, include provisions designed to help subcontractors collect unpaid amounts.
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Analysis Cash flow. No two words are more important to subcontractors. Progress payments are the lifeline that subcontractors depend upon to provide the funds to pay employees, suppliers and sub-subcontractors, and fund other essential business functions. Unfortunately, many subcontractors have learned the hard way that this lifeline can be a vulnerability when customers’ payments are improperly delayed. The secret of the successful subcontractor is to manage relationships with customers with a positive attitude while protecting against the financial harm created by potential late payments. Progress payments made in accordance with the contractually-agreed terms keep the subcontractor’s business running and foster fruitful, profitable relationships among the members of the project team. By contrast when an expected payment is delayed, the lifeline dries up and leaves the subcontractor in the lurch, scrambling for funds to pay its bills because of someone else’s unreliability.
ASA Member Concerns In the ASA 2015 member needs assessment, 96 percent of ASA members reported that slow progress payments are a “very serious” or “somewhat serious” problem. This confirms more than 50 years of ASA reporting on this issue. The evolution of the modern construction industry has transformed construction project cash flow and fostered the development of unfair payment structures for subcontractors in both private and public construction. As prime contractors have evolved from selfperforming employers of tradesmen, the opportunities for payment fraud have grown substantially.
Industry Policies Prompt payment is a major public policy issue for ASA. The association’s longstanding policy on payment reflects the interdependence of the construction process and the need for cooperation and openness by all parties involved in the construction process. The policy states: ASA supports legislation that requires owners to pay their prime contractors within 10 days after receipt of a proper invoice, prime contractors to pay their subcontractors within seven days of receiving payment from the owner, and subcontractors to pay their subcontractors and suppliers within seven days of receipt from the prime contractor. A late payment interest penalty must be paid automatically when payment is late. The Guidelines for a Successful Construction Project, jointly adopted by ASA, the Associated General Contractors of America, and the Associated Specialty Contractors states: “Undue delays by owners, architects, engineers, general contractors, subcontractors, and sub-subcontractors in processing amounts due to general contractors, subcontractors, sub-subcontractors, and suppliers, or in making timely payments of these amounts, impose hardships and improper financing 2
burdens on the contractors, and suppliers and amount to extensions of credit by the contractors and suppliers to their respective higher tiers.” These policies show the importance of this issue to the construction industry as well as the interdependence of the various components of the construction process.
Existing Laws and Trends The law and regulation regarding payment for federal construction is clear. The Prompt Payment Act of 1982 (Title 31, USC, Section 3901) and the Prompt Payment Act Amendments of 1988 (Title 31, USC, Section 3902) require the government to pay to pay prime construction contractors within 14 days of receipt and establish a payment standard for construction subcontractor and supplier payments of seven days after prime contractor payment by the government. Interest will accrue on late payments from the due date. The Federal Acquisition Regulation Sections 52.232.25 and 32.112-1 set forth the rights and procedures for the payment of subcontractors on federal construction. States also have responded to demands from those impacted by slow payments by passing a variety of prompt payment statutes dealing with both public and private construction work. The time period for paying subcontractors varies from state to state but typically does not begin until the contractor receives payment that includes payment for the subcontractor’s work (contingent payment clause). Such laws also provide difference enforcement mechanisms. Because of these differences among state laws, construction contractors and subcontractors should be aware of the payment protections that are accorded to them prior to beginning any job. For information about the laws in the states in which you do business, see the Foundation of ASA’s manual Prompt Payment in the 50 States.
Industry Practice Industry practice regarding progress payments is clearly laid out in the major model construction contracting documents, such those published by ConsensusDocs and the American Institute of Architects, as well as in the AGC/ASA/ASC Guidelines for a Successful Construction Project. Each of these contains similar elements addressing the issue of progress payments. The AGC/ASA/ASC “Guideline on Prompt Payment” suggests the following schedule of billings, certificates and payments by the participants in the construction process. The schedule assumes a normal trade contract allowing monthly progress payments for work performed and materials suitably stored through the end of a month.
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Day of Calendar Month 20th 25th
1st
5th 10th or sooner No more than 7 days after receipt No more than 7 days after receipt
Event Sub-subcontractors request payment from subcontractors. Subcontractors request payment from contractor incorporating the sub-subcontractor’s request in the billing. Contractor submits to the owner’s representative an itemized application for payment with the necessary supporting data, covering the monthly progress of the entire contract being performed. The owner’s representative issues the certificate for payment to the owner for the amount requested. The owner makes payment to the contractor for the amount certified by the owner’s representative. The contractor pays each subcontractor the amount received from the owner on its account promptly but not later than seven days after receipt. Each subcontractor pays each sub-subcontractor from the amount received from the contractor on its account promptly but no later than seven days after receipt.
A subcontract clause implementing this schedule might look something like this: The Subcontractor shall be paid progress payments each month on or before the 17th day of the month for the value of work completed and the value of material suitably stored as of the last day of the preceding month. The major model contracts also deal with progress payments from the owner to the prime contractor. ASA, along with more than 40 other associations representing construction owners, design professionals, prime contractors, subcontractors and sureties, has endorsed the ConsensusDocs family of documents. In its contract documents, ConsensusDocs endeavors to fairly allocate risk among the members of the construction team. The ConsensusDocs Form 200, Standard Agreement and General Conditions Between Owner and Constructor states: “9.2.1 APPLICATIONS Constructor shall submit to Owner, and if directed, Design Professional a monthly application for payment no later than the [_____] Day of the calendar month for the preceding calendar month. Constructor's applications for payment shall be itemized and supported by Constructor's schedule of values based on a percentage of completion and shall include any other substantiating data as required by this Agreement. Applications for payment shall include payment requests on account of properly authorized Change Orders or Interim Directives. Owner shall pay the amount due on a payment application, no later than fifteen (15) Days after accepting such application.”
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The ConsensusDocs Form 750, Standard Agreement Between Constructor and Subcontractor, states: “8.2.1 APPLICATIONS Subcontractor’s applications for payment shall be itemized and supported by substantiating data as required by the Subcontract Documents. If Subcontractor is obligated to provide design services pursuant to section 3.8, Subcontractor’s applications for payment shall show its design professional’s fee and expenses as a separate cost item. Subcontractor’s application for payment shall be notarized and if allowed under the Subcontract Documents may include a properly authorized Interim Directive. Subcontractor’s application for payment for the Subcontract Work performed in the preceding payment period shall be submitted for approval by Constructor in accordance with the schedule of values if required and subsections 8.2.2 through 8.2.4. Constructor shall incorporate the approved amount of Subcontractor’s application for payment into Constructor’s application for payment to Owner for the same period and submit it to Owner in a timely fashion. Constructor shall promptly notify Subcontractor of any changes in the amount requested on behalf of Subcontractor.” “8.2.3 TIME OF APPLICATION Subcontractor shall submit progress payment applications to Constructor no later than the [_____] Day of each payment period for the Subcontract Work performed up to and including the [_____] Day of the payment period indicating work completed and, to the extent allowed under the subsection below, materials suitably stored during the preceding payment period.”
Protecting Your Business Despite an industry standard for timely monthly progress payments, many subcontractors will attest to the difficulty of negotiating fair payment terms. Yet a subcontractor needs unambiguous payment terms to have:
A trigger date to begin computing interest when payment is late. A date on which it is entitled to payment to satisfy the legal requirements for lien filings and bond claims. A date to which it is entitled to payment as part of a systematic collections system.
Business Practices The best place to establish payment rights is in the bidding process. A subcontractor should consider conditioning its bid on the ConsensusDocs Form 750 using the “ASA Subcontractor Bid Proposal,” one of the documents in the ASA Subcontract Documents Suite. This document establishes an entitlement to payment. Addressing such issues up front will eliminate or reduce later payment problems. ASA’s Subcontractor Negotiating Tip on Progress Payment Timing provides subcontractors with arguments to use at the negotiating table. For example:
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When the GC Says: “I don’t always know when I’ll get paid, so I can’t set a specific time for your payment.” The Sub Should Say: “I have to pay my employees and suppliers even before you pay me. I can’t finance your company indefinitely while you work things out with your customer.” When the GC Says: “We can’t provide a specific due date when the owner will pay us.” The Sub Should Say: “I know that you generally have paid us monthly on past jobs. But certainly both of us will benefit from having a specific due date. You want to have a due date in your contract with the owner. Why shouldn’t I?” When the GC Says: “I will pay you as quickly as I can after I get paid.” The Sub Should Say: “Without a specific date on which I’m entitled to payment, I may not be able to satisfy the various legal requirements to exercise my rights for nonpayment, from interest to lien and bond rights to suspension of work.” When the GC Says: “My other subcontractors are willing to accept a pay-when-paid clause. My subcontract is fair.” The Sub Should Say: “A joint “Guideline on Prompt Payment,” endorsed by both AGC and ASA, establishes a timeline under which the subcontractor should get paid by the 17th day of the month. Invoicing To get paid, a subcontractor must submit a proper invoice. Each owner and prime contractor has its own form, criteria and specifications. The subcontractor has the obligation to both understand and submit its invoices in the proper manner. The criteria applied on federal construction projects are an excellent example of the type of information that is required. A proper invoice should contain:
Name and address of the subcontractor. Invoice date. Contract number. Description of work or services performed. Delivery and payment terms. Name and address of the official of the contractor to whom the invoice is being sent. Name and contact information for the person to be notified in case of a problem with the job or invoice. Certification and substantiation. Any other information or documentation required by the contract.
All invoices must be submitted in a timely manner. Submitting late invoices increases the likelihood of disputes or trouble in receiving payment. Collections Most subcontractors have learned through experience to plan for the contingency of improperly-late or partial payments. While any delay creates a difficult cash flow 6
position, there is also a matter of degree. Some customers will miss the due date in the rarest circumstances. Others are chronic late payers. Then there’s everyone inbetween. Collecting what is owed is as vital a part of the business to a subcontractor as performing the required work. To be successful, each subcontractor must be committed to collect what it is owed. It is vital to know and understand your rights and exercise them. For more ideas on establishing a collections program, see the ASA white paper on Improving Cash Flow: A Guide for Construction Subcontractors.
Conclusion Receiving timely payment for work properly performed is vital to any subcontractor. Avoiding or preventing late payments is essential. Education is the key. An educated subcontractor negotiates better contracts. Keep in mind that:
You are not only a subcontractor but also a creditor. You are a creditor because your work is performed on the promise of a future payment by a customer. You, as a responsible creditor, must hold up your end of the bargain according to the payment rules to which you agreed in the contract document. You must have collections tools at your disposal.
Late payment is unfortunately part of the construction business. However, subcontractors can protect themselves if they are proactive rather than reactive. Know and exercise your rights.
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