The American Institute of Architects produces some of the most commonly used contract documents for construction projects. If you are a subcontractor on a project using the AIA A401 Standard Form of Agreement Between Contractor and Subcontractor, you may wonder what the clauses about final payments mean. When do you have to submit your final payment application? When do you get your retainage? Can you make any changes to the contract to get paid faster? We’ll look at some of the final payment clauses in the AIA A401 GC-subcontractor agreement. We’ll also interpret the language, and offer possible changes you can request to help protect yourself from slow payments.
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American Institute of Architects contracts
The American Institute of Architects produces some of the most widely used standardized contract and payment documents in the construction industry. The Contractor-Subcontractor agreement is just one of a number of contracts that may be used on the same project.
It’s important to note that the AIA document A401 agreement refers to provisions in the Owner-Contractor Agreement. This may be the A101, A104, or A105 contract document. The agreement between an Owner and Contractor is known as the “Prime contract.” Before you sign a subcontractor agreement, request a copy of the prime contract. Make sure you understand what that higher-level contract requires, including any deadlines for the owner to pay the general contractor. Those deadlines will affect your own payment deadlines.
Billing upon substantial completion
11.2 – Substantial Completion – “When the Subcontractor’s Work or a designated portion thereof is substantially complete and in accordance with the requirements of the Prime Contract, the Contractor shall, upon application by the Subcontractor, make prompt Application for Payment for such Work.”
When your work is complete (except for punchlist items), it is your responsibility to submit a pay application to the GC for the completed work. Your invoice triggers the GC to bill the owner, which starts the clock that determines when final payment will be made (see next section).
11.2 (continued) – “Within 30 days following issuance by the Architect of the Certificate for Payment covering such substantially completed Work, the Contractor shall, to the full extent allowed in the Prime Contract, make payment to the Subcontractor, deducting any portion of the funds for the Subcontractor’s Work withheld in accordance with the certificate to cover costs of items to be completed or corrected by the Subcontractor…
Once the GC bills the Owner for your substantially completed work, the Architect will review the application for payment and issue a certificate of payment if it is approved. Then the GC has 30 days to pay you the remaining balance on your contract. The “remaining balance on your contract” depends on the terms of the prime contract with the owner and the GC.
Learn more about the AIA’s payment application: Filling out the G702 Application and Certificate for Payment
Release of retainage
11.2 (continued) – …Such payment to the Subcontractor shall be the entire unpaid balance of the Subcontract Sum if a full release of retainage is allowed under the Prime Contract for the Subcontractor’s Work prior to the completion of the entire Project. If the Prime Contract does not allow for a full release of retainage, then such payment shall be an amount which, when added to previous payments to the Subcontractor, will reduce the retainage on the Subcontractor’s substantially completed Work to the same percentage of retainage as that on the Contractor’s Work covered by the certificate.”
As we mentioned earlier, the language in the Prime Contract (between the GC and the owner) can have an impact on the subcontractor’s contract with the GC. This retainage clause is a prime example (no pun intended).
Here’s a translated version of this clause:
- If the Prime Contract allows for release of retainage before completion of the whole project, then the GC will pay the sub the entire remaining balance (including retainage).
- If the Prime Contract doesn’t allow for full release of retainage before completion of the whole project, then the sub’s “final payment” will be everything minus retainage. The sub’s retainage will be held until the whole project is done – not just when the sub’s work is done.
Some Prime Contracts allow for the early release of some or all of the retainage withheld from the subcontractor’s payments. As a subcontractor, you have a right to request a copy of the prime contract (the GC’s contract with the owner) so you can review the payment terms that affect you. Don’t be afraid to ask.
If the GC’s contract with the owner allows for it, then you should be paid in full upon substantial completion of your work. In the event that the prime contract doesn’t allow for early release of retention, then you will receive the balance of your subcontract minus whatever retainage rate the owner and GC agreed to.
This clause depends on the Prime Contract, which includes terms that the GC and owner already agreed to. As a result, the GC isn’t likely to pay retainage to you until the owner is paying retainage to them. If the Prime Contract doesn’t allow for early retainage payment, then the GC isn’t receiving retainage until the completion of the entire project. However, depending on the nature of the project – and your relationship with the GC – you might be able to negotiate for retainage to be released upon substantial completion of your scope of work.
Steps before collecting final payment
11.3.1 – “Final payment, constituting the entire unpaid balance of the Subcontract Sum, shall be made by the Contractor to the Subcontractor when the Subcontractor’s Work is fully performed in accordance with the requirements of the Subcontract Documents, the Architect has issued a Certificate for Payment covering the Subcontractor’s completed Work and the Contractor has received payment from the Owner.”
There are four things that have to be completed before you can collect your final retention payment:
- Your work has been fully completed in accordance with the Contract Documents;
- GC has submitted a payment application to the Architect that covers your completed work;
- Architect has approved a Certificate for Payment that includes your work; and
- GC has received payment from the Owner.
As we already mentioned above, make sure that you start the payment clock by submitting your invoice to the GC as soon as your work is complete.
Try to negotiate out conditions 2-4, so your payment is due immediately upon completion. This probably won’t fly with the GC, but you can negotiate the other conditions and get a quicker payment.
The right to demand payment
11.3.1 – “If, for any cause which is not the fault of the Subcontractor, a Certificate for Payment is not issued or the Contractor does not receive timely payment or does not pay the Subcontractor within seven days after receipt of payment from the Owner, final payment to the Subcontractor shall be made upon demand.”
If, for reasons that aren’t your fault, final payment from the Owner is delayed, or if the GC receives final payment and hasn’t paid you within seven days, then you have a right to send a demand letter for final payment. Contact the GC to see where they stand in their process and find out if there is anything holding up the final payment that’s your fault. If the delay is not your fault, you have a contractual right to demand payment.
None. This is already a pretty strong clause to protect a subcontractor’s right to payment.
Paying your subcontractors & suppliers before you’re paid
11.3.2 – “Before issuance of the final payment, the Subcontractor, if required, shall submit evidence satisfactory to the Contractor that all payrolls, bills for materials and equipment, and all known indebtedness connected with the Subcontractor’s Work have been satisfied. Acceptance of final payment by the Subcontractor shall constitute a waiver of claims by the Subcontractor, except those previously made in writing and identified by the Subcontractor as unsettled at the time of final Application for Payment.”
The GC can require you to turn in lien waivers and other documents showing proof that all debt regarding the project has been paid before releasing the final payment. This is a common practice, as everyone wants to be protected from unknown liens. This also says that accepting final payment is a waiver of further lien rights, except for amounts previously identified in writing. So, if you have a supplier or sub that you are in a payment conflict with, make sure you let the GC know before final payment is released.
This clause says you must pay your subs and suppliers before you receive your final payment. Maybe try to negotiate the language so you provide conditional lien waivers showing amounts owed, or you provide final lien waivers 30 days after you receive the final payment. This will give you the time you need to collect these final lien waivers and proof of payment without having to front the money.
11.4 – Interest – “Payments due and unpaid under this Subcontract shall bear interest from the date payment is due at such rate as the parties may agree upon in writing or, in the absence thereof, at the legal rate prevailing from time to time at the place where the Project is located.”
If payments are not made per the terms of the contract (as spelled out in the first part of Section 11), you can charge an interest rate that is agreed upon ahead of time (it may be spelled out in the contract in this section), or at the legal prevailing rate at the project location. Be aware that this contract sets up a pay-when-paid payment schedule. You don’t get paid until at most seven days after the GC gets paid. In order to charge interest, you would have to show that the GC had been paid and it took longer than seven days after that for you to get paid. Remember that you also have the right to demand payment when your work is not the cause of a payment delay.
Make sure you know what the interest rate is per your contract. If it is not explicitly stated in this section, ask the GC to include it so everyone is clear what the penalty is for late payment.
Understand the contract terms, and talk it out
We made it! You should read the final payment clauses of your contract carefully and make sure you understand the terms you are agreeing to. If you are not comfortable with any of the payment terms, reach out to the GC and see if there is some wiggle room on their side. Most contractors will hear you out. However, they may not agree to the changes. In that case, you will have to decide if you want to work with them. Don’t get stuck with terms you can’t live with.
Don’t rely on your contract to protect your payment
You should always have a signed contract before you begin work on a construction project. However, don’t assume that your contract will protect your payment at the end of the job. Yes, you could probably sue for breach of contract if you don’t get paid. But that can be an expensive, time-consuming process, and the outcome is never guaranteed. There are state and federal laws that give you other powerful remedies to make sure you get paid for the work that you do. Contractors can protect themselves by following a final payment checklist.
Protect your lien rights
Always protect your right to file a lien, no matter how strong you think your contract is. Filing a mechanics lien is one of the most powerful tools you have to get paid on a construction project. However, in most states, you have to file preliminary notices and other documents before, during, and/or after the project in order to be able to file a lien.
Know your state’s prompt payment law
Nearly every state has prompt payment laws that set deadlines for construction payments. These laws give you the right to payment within a specific number of days. Learn the prompt payment requirements in your project’s state. And know how to take advantage of prompt payment laws to get paid faster – without a lawsuit.
Dive even deeper into your contract
- Subcontractor’s Guide to Progress Payments in the AIA A401
- Pros & cons of using AIA contract documents
- Common contract parts, and what they mean
- Download a free construction contract template