Some of the most important provisions in your construction contract are the terms for requesting and receiving payment. This article covers the elements of payment clauses and their significance.
Elements of payment provisions in construction contracts
Common elements addressed in payment provisions include timing, rights to withhold payment, and conditions for final payment.
How are the Timing of Payments Defined in the Construction Contract?
Timing provisions concerning payment in construction contracts establish when pay applications must be submitted, what information and documentation you must include, and when payments will occur. Having these details in place is important for establishing clear communications regarding payments due and transparency regarding when payment must be issued.
What are Pay-When-Paid Clauses in A Construction Contract?
Pay-when-paid clauses make payment of the payee contingent on the payor’s corresponding receipt of payment from their customer. They are commonly found in agreements between general contractors and subcontractors or subcontractors and lower tier parties. While pay-when-paid clauses remain common, recent case law has established that many of them are void as a matter of law in California. Specifically, courts have found pay-when-paid clauses violate Civil Code section 8122 which limits the waiver of impairment of others’ rights by contract. Any language that could result in payment being delayed for a period that would be considered unreasonable by industry standards is arguably void. You can find our article exploring the enforceability of pay-when-paid clauses in California here.
Does the Contract Provide for Withholding Payment During a Dispute?
Construction contracts favoring the owner often contain reservations of rights permitting the Owner to withhold payment during a dispute over the amount due, defective work, delay, or other contractual grounds. These provisions should be considered carefully, especially when the contractor has a duty to continue work not withstanding a dispute.
What are Conditions Precedent to Final Payment?
Conditions precedent to final payment include an enumeration of the conditions that must be met before final payment is required to be made. Appropriate conditions precedent to final payment include:
- The deliverables: (i.e. warranties, operating manuals, etc.);
- Issuance of a certificate of occupancy.
- Consent of the surety.
- And an affidavit of payment of all debts and claims.