ConsensusDocs are standard construction documents put together by a team of people in the industry representing all facets of a project, from design to contracting to ownership. The documents are supposed to be more neutral than other standard documents provided by other organizations. Here we’ll look at the payment clauses from the ConsensusDocs 750 Standard Agreement Between Constructor and Subcontractor.
Construction contracts form the basis of every project. They typically outline key roles and responsibilities of each party on the job, how contractors and suppliers apply for payment, and how payments are made. Additionally, they will generally include information about penalties and recourse in the event that a party doesn’t fulfill the contract, or otherwise hold up their end of the bargain.
ConsensusDocs 750 Subcontract Agreement
Note: This is the big brother contract to the ConsensusDocs 751 short form subcontractor agreement.
Schedule of Values
8.1 Schedule of Values – “As a condition precedent to payment, Subcontractor shall provide a schedule of values satisfactory to Constructor not more than fifteen (15) Days from the date of execution of this Agreement.”
What it means
A schedule of values is a breakdown of the work into phases or locations that makes it easier for the General Contractor to determine how much work is complete.
For example, an electrician may include underground, rough-in, wiring, and finish as the stages of the project. Each item of work on the list is given a dollar value. With each payment application, the electrician will submit an invoice broken down by how much work in each of the phases is complete (for example, underground is 100% complete and rough-in is 50% complete).
Applying for Progress Payments
8.2.1 Progress Payments – 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 [sections] 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.”
What it means
You will want to review all the documents included with the project (especially specifications) so you know what back-up documents you will need to provide with each payment application. If design services are part of your scope of work, they will need to be broken out separately in your schedule of values. This clause calls for you to notarize your payment applications, so be aware of that. Interim directives are similar to change orders, except they are unilateral changes by the owner before you agree on a price or time adjustment. According to this, you can only bill for them if the subcontract allows you to.
The GC will submit their invoice to the owner for your work with the next payment application and in a timely manner. The amount requested will be determined by the schedule of values and the sections that follow. If the GC makes any changes to the amount the Subcontractor requested, the GC has the responsibility to communicate that to the Sub.
8.2.2 Retainage – “The rate of retainage shall be ____ percent, which is equal to the percentage retained from Constructor’s payment by Owner for the Subcontract Work. If the Subcontract Work is satisfactory and the prime agreement provides for reduction of retainage, Subcontractor’s retainage shall also be reduced when Constructor’s retainage of the Subcontract Work has been so reduced by Owner.”
What it means
In construction, standard retention is 5 to 10 percent. This money is held back from each progress payment to guarantee that the work will be completed at the end of the project. Once the project is complete, the punch-list items have been done, and closeout documents have been collected, the retained amounts are paid out. Some states have laws about the max percentage of retainage that can be withheld (for example, in Oregon it is 5%). Be sure to know what the limits are, if there are any, in your state.
Some contracts allow the contractor to not only have their retainage reduced at a certain point, but also to get a payout of some of the withheld retainage. This is typically structured at 50% completion and can be incredibly useful to maintain cash flow during the latter end of the project. Ask the GC if their contract with the owner allows for an early retainage payment.
Pay application deadline
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.”
What it means
This section sets the payment application periods, which, under this contract, are structured as progress payments. Usually, projects are invoiced monthly, so expect this schedule to reflect submitting on that schedule. It is very important that you submit your invoices in a timely manner, preferably before the deadline. If extenuating circumstances come up, contact the GC and see if you can work something out. Note that only completed work is included in the payment applications.
Billing for stored materials
8.2.4 Stored Materials – “Unless otherwise provided in the Subcontract Documents, applications for payment may include materials and equipment not yet incorporated in the Subcontract Work but delivered to and suitably stored on or off the Worksite including applicable insurance, storage, and costs incurred transporting the materials to an off-site storage facility. Approval of payment applications for such stored items on or off the Worksite shall be conditioned upon submission by Subcontractor of bills of sale and required insurance or such other procedures satisfactory to Owner and Constructor to establish Owner’s title to such materials and equipment, or otherwise to protect Owner’s and Constructor’s interest including transportation to the Worksite.”
What it means
On some projects, stored materials can be billed for before they are installed. Usually, this requires providing back-up documentation, including invoices and proof of insurance for stored materials. Note that stored materials insurance is a separate coverage that isn’t included in your normal premiums. Be sure you know how much extra this will cost before you decide to invest in it.
Progress payment timing
8.2.5 Time of Payment – “Progress payments to Subcontractor for satisfactory performance of the Subcontract Work shall be made no later than seven (7) Days after receipt by Constructor of payment from Owner for the Subcontract Work. If payment from Owner for such Subcontract Work is not received by Constructor, through no fault of Subcontractor, Constructor will make payment to Subcontractor within a reasonable time for the Subcontract Work satisfactorily performed.”
What it means
This is a “Pay When Paid” clause, also known as a contingent clause. It basically says that the sub’s payment is contingent on the GC receiving payment from the owner. The GC is required to pay the sub within seven days of receiving payment from the owner.
If you live in a state with a Prompt Payment law, be sure to check it and make sure this schedule falls within the law – including the timing from the owner to the GC. If payment from the Owner is delayed through no fault of the subcontractor, then payment can be expected within a “reasonable time.”
Right to stop work for payment delays
8.2.6 Payment Delay – “If Constructor has received payment from Owner and if for any reason not the fault of Subcontractor, Subcontractor does not receive a progress payment from Constructor within seven (7) Days after the date such payment is due, as defined in the subsection immediately above, or, if Constructor has failed to pay Subcontractor within a reasonable time for the Subcontract Work satisfactorily performed, Subcontractor, upon giving seven (7) Days’ written notice to Constructor, and without prejudice to and in addition to any other legal remedies, may stop work until payment of the full amount owing to Subcontractor has been received. The Subcontract Amount and Time shall be adjusted by the amount of Subcontractor’s reasonable and verified cost of shutdown, delay, and startup, which shall be effected by an appropriate Subcontractor Change Order.”
What it means
This clause gives you the right to stop work until you are paid, under certain circumstances and after you’ve submitted proper written notice. You also have the right to request additional time and money to cover the cost of stopping and restarting work. Make sure you follow the notice requirements carefully: You notify the GC seven days after the payment is due, and seven days after the notice you can stop work (so 14 days after payment is due as per section 8.2.5 above). If you add all those days up, you can stop work 21 days after the GC has been paid by the Owner, or 14 days after a “reasonable time” has passed.
Reasons to withhold payments
8.2.7 Payments Withheld – “Constructor may reject a Subcontractor application for payment in whole or in part or withhold amounts from a previously approved Subcontractor application for payment, as may reasonably be necessary to protect Constructor from loss or damage for which Constructor may be liable and without incurring an obligation for late payment interest based upon:
126.96.36.199 Subcontractor’s repeated failure to perform the Subcontract Work as required by this Agreement;
188.8.131.52 except as accepted by the insurer providing Builders Risk or other property insurance covering the Project, loss or damage arising out of or relating to this Agreement and caused by Subcontractor to Owner, Constructor, or others to whom Constructor may be liable;
184.108.40.206 Subcontractor’s failure to properly pay for either labor, materials, equipment, or supplies furnished in connection with the Subcontract Work, provided that Constructor is making payments to Subcontractor for that portion of the Subcontract Work in accordance with this Agreement;
220.127.116.11 rejected or defective Subcontract Work which has not been corrected in a timely fashion;
18.104.22.168 reasonable evidence of delay in performance of the Subcontract Work such that the Work will not be completed within the Subcontract Time, and that the unpaid balance of the Subcontract Amount is not sufficient to offset the liquidated damages or actual damages that may be sustained by Constructor as a result of the anticipated delay caused by Subcontractor;
22.214.171.124 reasonable evidence demonstrating that the unpaid balance of the Subcontract Amount is insufficient to cover the cost to complete the Subcontract Work; and
126.96.36.199 uninsured third-party claims involving Subcontractor or reasonable evidence demonstrating that third-party claims are likely to be filed unless and until Subcontractor furnishes Constructor with adequate security in the form of a surety bond, letter of credit, or other collateral or commitment sufficient to discharge such claims if established.
No later than seven (7) Days after receipt of an application for payment, Constructor shall give written notice to Subcontractor, at the time of disapproving or nullifying all or part of an application for payment, stating its specific reasons for such disapproval or nullification, and the remedial actions to be taken by Subcontractor in order to receive payment. When the above reasons for disapproving or nullifying an application for payment are removed, payment will be promptly made for the amount previously withheld.”
What they mean
These clauses lays out all the reasons a sub’s invoice can be partially or wholly rejected. They are:
- Not performing the work according to the contract
- Loss or damage to the project
- Failure to pay suppliers or lower-tier subs
- Rejected or defective work
- Delaying the project
- Third-party claims on the project involving the sub
The GC has seven days after receiving an invoice to let the sub know, in writing, that their invoice has been modified. The GC must let the sub know what needs to be done to rectify the situation and must pay the sub the remaining amount as soon as it is cleared up.
8.3.1 Final Payment – Application – “Upon acceptance of the Subcontract Work by Owner and Constructor and receipt from Subcontractor of evidence of fulfillment of Subcontractor’s obligations in accordance with the Subcontract Documents and the subsection below, Constructor shall incorporate Subcontractor’s application for final payment into Constructor’s next application for payment to Owner without delay, or notify Subcontractor if there is a delay and the reasons for the delay.”
What it means
Upon acceptance of the sub’s work, a final invoice from the sub, and the documentation listed below or in other parts of the Subcontract Documents, the GC will final bill for sub’s portion of the work with the next payment application. If there are any delays in submitting the sub’s final bill, the GC will let the sub know.
What Sub Must Include With Final Pay Application
8.3.2 Requirements – “Before Constructor shall be required to incorporate Subcontractor’s application for final payment into Constructor’s next application for payment, Subcontractor shall submit to Constructor:
(a) An affidavit that all payrolls, bills for materials and equipment, and other indebtedness connected with the Subcontract Work have been paid, satisfied, or are to be paid with the proceeds of final payment, so as not to encumber Owner’s property, Constructor, or Constructor’s surety;
(b) As-built drawings, manuals, copies of warranties, startup and testing required in [section] 3.26, and all close-out documents and satisfaction of close-out procedures if required by the Subcontract Documents;
(c) Release of any liens, conditioned on final payment being received, and in such form, as may be required by the Subcontract Documents;
(d) Consent of surety to final payment, if required;
(e) A report of any outstanding known and unreported accidents or injuries experienced by Subcontractor at the Worksite;
(f) Other data, if required, such as receipts and releases.”
What it means
This is a list of all the documents that may be required before sub’s final invoice will be billed to the owner:
- Proof that all subs, suppliers, and employees who furnished labor or material to the project have been paid or will be paid.
- Close-out documents as defined by the contract, such as warranties and manuals.
- Lien waivers as required.
- Consent from the sub’s bonding company to release final payment (if required by contract).
- Report on accidents or injuries that have not been reported yet.
- Other documents as requested.
Be sure you know what documents will be required from you before you submit your final invoice. It is best to begin collecting these documents as early as possible to avoid delays.
Final Payment Timing
8.3.3 Time of Payment – “Final payment of the balance due of the Subcontract Amount shall be made to Subcontractor within seven (7) Days after receipt by Constructor of final payment from Owner for such Subcontract Work.”
What it means
Final payment is due within seven days of payment by the Owner to the GC for your scope of work. If payment is slow in coming, you could contact the Owner directly to see if payment has been made. Most GCs won’t like this, as they don’t want you contacting their client, but you are well within your rights to ask if payment has been made.
Final Payment Delays
8.3.4 Final Payment Delay – “If Owner or its designated agent does not issue a certificate for final payment or Constructor does not receive such payment for any cause which is not the fault of Subcontractor, Constructor shall promptly inform Subcontractor in writing. If final payment from Owner for such Subcontract Work is not received by Constructor, through no fault of Subcontractor, Constructor will make payment to Subcontractor within a reasonable time.”
What it means
If there is a delay in receiving the final payment from the Owner, that is not your fault, the Constructor must let you know about it. Final payment will be made in a reasonable amount of time.
Waiving your right to claims
8.3.5 Waiver of Claims – “Final payment shall constitute a waiver of all claims by Subcontractor relating to the Subcontract Work, but shall in no way relieve Subcontractor of liability for the obligations assumed under [sections] 3.20 and 3.21, or for faulty or defective work or services discovered after final payment, nor relieve Constructor for claims made in writing by Subcontractor as required by the Subcontract Documents before its application for final payment as unsettled at the time of such payment.”
What it means
Receipt of final payment means you release your right to file a claim or a lien, except for:
- Faulty or defective work discovered after final payment, or
- Any open claims submitted before the GC’s final payment application.
It is important to let the GC know of all payment issues before final payment is received, as this closes the window on the opportunity to ask for more funds or file a claim or lien.
Interest on late payments
8.4 Late Payment Interest – “Progress payments or final payment due and unpaid under this Agreement shall bear interest from the date payment is due at the prevailing statutory rate at the place of the Project. However, if Owner fails to timely pay Constructor as required under the prime agreement through no fault or neglect of Constructor, and Constructor fails to timely pay Subcontractor as a result of such nonpayment, Constructor’s obligation to pay Subcontractor interest on corresponding payments due and unpaid under this Agreement shall be extinguished by Constructor promptly paying to Subcontractor Subcontractor’s proportionate share of the interest, if any, received by Constructor from Owner on such late payments.”
What it means
Late payments will incur interest at the prevailing rate at the project location. However, if the GC isn’t paying you because the Owner isn’t paying them, then the only interest the GC owes you is a portion of the interest the GC collected on their late payment. For example, if the Owner is late and pays the GC $100 in interest, then you get only a percentage of that, based on how much their invoice is for.
Lien rights & costs
8.5 Continuing Obligations – “Provided Constructor is making payments in accordance with this Agreement, Subcontractor shall reimburse Constructor for costs and expenses for any claim, obligation, or lien asserted before or after final payment is made that arises from the performance of the Subcontract Work. Subcontractor shall reimburse Constructor for costs and expenses including attorneys’ fees and costs and expenses incurred by Constructor in satisfying, discharging, or defending against any such claims, obligation, or lien, including any action brought or judgment recovered. If any Law or bond requires Subcontractor to take any action before the expiration of the reasonable time for payment referenced in [section] 8.2.5 in order to preserve or protect Subcontractor’s rights with respect to mechanic’s lien or bond claims, then Subcontractor may take that action before the expiration of the reasonable time for payment and such action will not: (a) create the reimbursement obligation recited above, (b) be in violation of this Agreement, or (c) be considered premature for purposes of preserving and protecting Subcontractor’s rights.”
What it means
As long as the GC is making their payments to you on time, if a claim or lien is filed in regards to your work, you agree to reimburse the GC for any costs the GC incurred to satisfy the lien or the claim. These costs include attorneys’ fees, settlements, etc.
However, if you have to file a lien or claim in order to protect your right to payment, and it happens to fall before the “reasonable time” referenced in section 8.2.5 has expired, you can do so without having to pay the GC’s costs, violating the agreement, or being considered premature in your action. This clause gives you permission to protect your lien rights when you need to, without repercussion.
Allowable use of funds
8.6 Payment Use Restriction – “Payments received by Subcontractor shall be used to satisfy the indebtedness owed by Subcontractor to any person furnishing labor or materials, or both, for use in performing the Subcontract Work through the most current period applicable to progress payments received from Constructor before it is used for any other purpose. In the same manner, payments received by Constructor for the Subcontract Work shall be dedicated to payment to Subcontractor. This applies to this Agreement only, and is not for the benefit of third parties. Moreover, this section does not restrict commingling funds nor require separate accounts for deposits. Nothing in this section creates a fiduciary duty on the Parties, nor creates any tort cause of action or liability for breach of trust, punitive damages, or other equitable remedy or liability for alleged breach.”
What it means
This clause of the ConsensusDocs 750 says payments received by the sub from the GC must go to pay expenses for that job and that time period before they go to pay anyone or anything else. This is supposed to keep you from using the funds from one job to pay for another. The good thing is the next sentence says the GC agrees to abide by this same agreement when it comes to funds it receives from the Owner. If everyone does what they are supposed to, everyone should get paid in a timely manner. The last part explains that this is just for the benefit of the GC and the sub only and doesn’t create a legally binding agreement where one can sue the other for not following this section. It is a gentleman’s agreement, so to speak.
Verifying that you pay your subs & suppliers
8.7 Payment Verification – “If Constructor has reason to believe that Subcontractor is not complying with payment terms in this Agreement, Constructor may contact Subcontractor’s subcontractors and suppliers to ascertain whether they are being paid by Subcontractor in accordance with this Agreement.”
What it means
If the GC doesn’t think a sub is paying its bills for a project, they can contact the sub’s subs and suppliers and see what is going on. A lot of GCs are doing this these days. Everyone wants to be protected from surprise claims or mechanics liens.
Conditional lien waivers
8.8 Partial Lien Waivers and Affidavits – “As a prerequisite for payments, Subcontractor shall provide, in a form satisfactory to Owner and Constructor, partial lien and claim waivers in the amount of the application for payment and affidavits covering its subcontractors and suppliers for completed Subcontract Work. Such waivers shall be conditional upon payment. In no event shall Subcontractor be required to provide an unconditional waiver of lien or claim, before receiving payment or in an amount in excess of what it has been paid.”
What it means
Before receiving each payment, you will need to provide a conditional lien waiver for the amount owed, and an affidavit showing how much is owed to subs and suppliers for the completed work. You will not be required to sign an unconditional lien waiver before receiving payment or for an amount greater than what you have been paid. This section offers protection for all parties that the amounts paid will satisfy all known claims for that period and there will be no surprises.
Actions if you don’t pay your subs & suppliers
8.9 Subcontractor Payment Failure – “Upon payment by Constructor, Subcontractor shall promptly pay its subcontractors and suppliers the amounts to which they are entitled. If Constructor has reason to believe that labor, material, or other obligations incurred in the performance of the Subcontract Work are not being paid, Constructor may give written notice of a potential claim or lien to Subcontractor and may take any steps deemed necessary to assure that progress payments are utilized to pay such obligations, including but not limited to the issuance of joint checks. If upon receipt of notice, Subcontractor does not (a) supply evidence to the satisfaction of Constructor that payment owed has been paid; or (b) post a bond indemnifying Owner, Constructor, Constructor’s surety, if any, and the premises from a claim or lien, Constructor shall have the right to withhold from any payments due or to become due to Subcontractor a reasonable amount to protect Constructor from any and all loss, damage, or expense including attorneys’ fees that may arise out of or relate to any such claim or lien.”
What it means
If the GC believes that you aren’t paying your subs or suppliers, the GC can send a written notice to you and then take any action they see fit to make sure payments are made to your vendors. One way to do this is with joint checks, made out to both the subcontractor and their sub or supplier. If you don’t show evidence that the vendors have been paid or post a bond to cover any possible claims on the project, then the GC can withhold payment to cover any claims or liens, and any fees associated with settling them.
Invoice factoring & financing
8.10 Subcontractor Assignment of Payments – “Subcontractor shall not assign any payment due or to become due under this Agreement, without the written consent of Constructor, unless the assignment is intended to create a new security interest within the scope of Article 9 of the Uniform Commercial Code. Should Subcontractor assign all or part of any payment due or to become due under this Agreement to create a new security interest or for any other purpose, the instrument of assignment shall contain a clause to the effect that the assignee’s right in and to any money due or to become due to Subcontractor shall be subject to the claims of all persons, firms, and corporations for services rendered or materials supplied for Subcontract Work.”
What it means
This clause has to do with invoice factoring and financing. If a sub wishes to sell or use their invoices on this project as collateral, the GC must agree to the transaction. If the sub does factor or finance the invoices on the project, the agreement with the factoring or financing company must state that the funds are subject to claims from vendors who provided work or materials on the job for that sub. This protects the lower-tier subs and suppliers from being left without recourse when the sub sells their invoices or uses them for collateral.
Payment doesn’t mean your work is accepted
8.11 Payment Not Acceptance –“Payment to Subcontractor does not constitute or imply acceptance of any portion of the Subcontract Work.”
What it means
At any time during or after the project is complete, a sub can still be required to correct faulty work. Problems can be caught at any time during the project, and many don’t become noticeable until the work is further along. This is a pretty standard clause for the industry.
Negotiating payment clauses in the ConsensusDocs 750
Overall, payment clauses in the ConsensusDocs 750 are more friendly to subcontractors than many other standard form contracts, in that they hold the GC to a lot of the same payment terms.
ConsensusDocs subcontracts are dependent on the agreement between the property owner and GC. Ask for a copy of the agreement between the Owner and GC, so you know when payment is expected between them, and what additional terms you are agreeing to.
Keep in mind that these are standardized contracts. You should always attempt to negotiate favorable terms and clarifications of terms and timelines. But be sure to understand your state’s prompt payment requirements, and other statutes that govern what contract terms can and cannot say. Make sure that your subcontract doesn’t conflict with them.
Be sure to review any contract that you receive carefully, even if it is a standard form. If you have any questions or concerns about a contract, it is always best to contact an attorney.