Ever read the payment clause in the AIA A401 Standard Form of Agreement Between Contractor and Subcontractor? Understand any of it? We feel your pain. Here’s a deep dive into the progress payments portion of that clause, with an interpretation in regular English and some suggestions for changes that may help you get paid faster.
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American Institute of Architects contracts
The American Institute of Architects produces some of the most widely used standardized construction 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.
Payments to your subs & suppliers
11.1.1: “Unless the Contractor provides the Owner with a payment bond in the full penal sum of the Contract Sum, payment received by the Contractor and Subcontractor for Work properly performed by their contractors and suppliers shall be held by the Contractor and Subcontractor for those contractors or suppliers who performed Work or furnished materials, or both, under contract with the Contractor or Subcontractor for which payment was made to the Contractor by the Owner or to the Subcontractor by the Contractor, as applicable.”
Simply put, this means you must use the funds you receive for a project to pay your subcontractors and suppliers on that project first. Before you use it for overhead expenses or payroll or anything else. This is to help ensure that lower-tier subs and suppliers get paid in a timely manner for the work they’ve done. The only way around this clause is to provide a payment bond, which means that your surety company is guaranteeing the payment of lower-tier subs and suppliers. They will have to make the payments if you don’t.
You could suggest striking this provision, but not many GCs will go for it. They want to protect their contract (which probably has the same terms) from the possibility of liens. Or you can supply a payment bond, and it will be between you and your surety to decide who pays your subs and suppliers.
Payment Application deadline
11.1.3: “Provided an Application for Payment is received by the Contractor not later than the ____ day of a month, the Contractor shall include the Subcontractor’s Work covered by that application in the next Application for Payment which the Contractor is entitled to submit to the Architect….
11.1.4: If the Subcontractor’s application for payment is received by the Contractor after the application date fixed above, the Subcontractor’s Work covered by it shall be included by the Contractor in the next Application for Payment submitted to the Architect.”
Long story short: Get your payment applications in on time and make sure they are complete. Typically, you’ll need to submit a pay application each month. If you don’t meet the deadline set by the prime contractor, you could delay your payment by 30 days or longer!
The sure way to keep this from happening is to turn your invoice in before the deadline. The earlier, the better. Set a reminder a couple of days ahead of time so you have time to gather the information you need. Use a checklist of items to include with your pay application so you don’t leave anything out. You can project the amount of work you will have completed by the end of the month and most GCs will accept it. Just don’t over-project!
Frankly, you won’t have much luck trying to change this provision. On larger projects, the GC has to collect pay applications from dozens of contractors and suppliers. GCs need to cut off the receipt of costs at some point so they can bill the owner. Ultimately, it’s best to establish a consistent internal process for collecting documents and submitting them on time, every time. If you know you’re going to have a problem meeting their deadline, talk to them about it and see if something can be worked out. If you want to get paid on time, get in the habit of sending pay applications before the contract deadline.
Payment within 7 days of payment to GC
11.1.3: “The Contractor shall pay the Subcontractor each progress payment no later than seven working days after the Contractor receives payment from the Owner.”
This clause is already pretty clear. After the GC gets paid by the owner, the GC should pay the subcontractor within 7 working days. The challenge here is knowing when the owner has paid the GC. Payments aren’t very visible to parties on a construction project that aren’t directly involved.
It’s important to know your state’s prompt payment laws here. Nearly every state has laws that set deadlines for payments on a construction project. There’s a deadline for the GC to pay the subcontractor AND for the owner to pay the GC. In some states, the law doesn’t allow the deadline to be changed by contract. If you know how long the owner has to pay the GC, you can calculate a general idea of when your payment should be forthcoming. Of course, the prompt payment deadlines vary wildly state-by-state. So, read up on your state’s law before challenging a payment delay.
You can try to get this taken out of the contract, but GCs will probably push back. Most aren’t set up financially to be able to pay their subs before the owner pays them. You could try to get the time frame shortened, especially if your state has a shorter Prompt Payment period.
Also, a useful thing to include could be some sort of notice provision. Such as, “Contractor will notify Subcontractor upon receipt of payment from the Owner.”
If your payment is late and you’re getting the run-around from the GC, you may want to reach out to the owner and see if payment has been released yet. Some GCs may not like you reaching out, but you must protect your rights if you aren’t getting an answer.
The right to demand payment
11.1.3: “If the Architect does not issue a Certificate for Payment or the Contractor does not receive payment for any cause which is not the fault of the Subcontractor, the Contractor shall pay the Subcontractor, on demand, a progress payment computed as provided in Sections 11.1.7, 11.1.8, 11.1.9 and 11.2.” (We cover these sections below.)
If a payment to the GC is delayed, through no fault of yours, you can demand that the GC make a progress payment to you. This clause gives you the right to demand payment and the GC is contractually bound to give it to you if this sentence is in your contract with them. It’s that easy! We will go into how the progress payment is calculated below.
This clause is incredibly helpful, and subcontractor friendly. If this clause is missing from your contract, try to ask for it to be added back in.
Schedule of values
11.1.5: “The Subcontractor shall submit to the Contractor a schedule of values prior to submitting the Subcontractor’s first Application for Payment. … The schedule of values shall allocate the entire Subcontract Sum among various portions of the Subcontractor’s Work … and shall be used as a basis for reviewing the Subcontractor’s Application for Payment.”
A schedule of values (SOV) is a breakdown of your work into various phases or locations that makes it easier for the GC to determine how much work is complete.
For example, a plumber may include underground plumbing, rough-in, top-out, and finish as the stages of the project. Each of these line items on an SOV and are assigned a dollar value. With each application for payment, the plumber submits an invoice that breaks down how much work in each of the stages is complete. For example, underground is 100% complete and rough-in is 50% complete. Those percentages determine the amount the plumber can bill for.
None. This requirement is useful to all parties on the project for accounting purposes.
Work, stored materials, and change orders
22.214.171.124: “The amount of each progress payment shall first include:
.1 That portion of the Subcontract Sum properly allocable to completed Work;
.2 That portion of the Subcontract Sum properly allocable to materials and equipment delivered and suitably stored at the site by the Subcontractor for subsequent incorporation in the Subcontractor’s Work or, if approved by the Contractor, suitably stored off the site at a location agreed upon in writing; and
.3 The amount, if any, for changes in the Work that are not in dispute and have been properly authorized by the Contractor …”
This clause says that you can include completed work, stored materials, and approved change orders in each application for payment.
None. However, there are some cautions worth noting:
- Not every project allows you to bill for stored materials. Sometimes you are only allowed to bill for completed work. Ask the GC before billing for an item if you have a question about it.
- If billing for stored materials is allowed, you will likely have to provide a certificate of insurance showing coverage for the stored materials. This is a separate coverage that isn’t included in your normal premiums. Make sure the cost is worth it before you go to extra lengths to get this coverage.
- Change orders need to be approved by the GC before you can bill for them. Try to avoid change order work before receiving written approval. If the GC refuses to send a formal change order, make sure you at least get an email or text saying they approve the work and additional payment. Ask for as much detail as possible about the change in scope and payment.
Reductions in payment
126.96.36.199: “The amount of each progress payment shall then be reduced by:
.1 The aggregate of previous payments made by the Contractor;
.2 The amount, if any, for Work that remains uncorrected and for which the Contractor has previously withheld a Certificate for Payment as provided in Article 9 of AIA Document A201-2017 for a cause that is the fault of the Subcontractor;
.3 For Work performed or defects discovered since the last payment application, … as provided in Article 9 of AIA Document A201-2017, for a cause that is the fault of the Subcontractor; and
.4 Retainage withheld pursuant to Section 11.1.8 of this Agreement.”
The first item makes sense – subtract any previous amounts paid from the amount of work completed.
The next two items deal with uncorrected or defective work. The GC has the right to withhold funds for any work found to be substandard or defective until the work is corrected. The GC determines the value of the defective work and holds that money from the sub. It is up to the sub to prove that the work has been completed or corrected and to ask for payment on the withheld amount.
You can try to remove the portions dealing with your defective work, but that’s unlikely. GCs will want the leverage to hold the funds until it has been corrected.
What’s most important here is that you have a clear process for documenting everything. In the event that there’s a disagreement or dispute over your work, you want to have evidence that backs you up.
188.8.131.52: “For each progress payment made prior to substantial completion of the Subcontractor’s Work, the Contractor may withhold the following amounts as retainage from the payment otherwise due: _____.”
Standard retention is 5 to 10 percent. This money is held from each progess payment as a guarantee that the work will be completed to the owner’s satisfaction at the end of the project. Once all work is complete and the owner is satisfied, then the retained amounts are paid out.
Some states have laws about the maximum percentage of retainage that can be withheld (for example, in Oregon, retainage can’t exceed 5%). Be sure to know what the limits are, if there are any, in your state.
If the Contractor is trying to hold 10% and your state only allows 5%, don’t budge on this. Stick with what the law requires.
Negotiate the lowest retainage rate possible. Often, especially if you have prior experience with the GC, and they trust your work, they may be willing to forego retainage; some even offer discounts on work in lieu of retainage.
184.108.40.206: “Reduction or limitation of retainage, if any, shall be as follows: _____.”
In this contract clause, you and the GC will spell out any agreements on variable retainage.
Variable retainage can refer to:
- A lower retainage rate on materials compared to labor (or vice versa)
- A retainage rate that is reduced once a certain milestone or percentage of completion is reached
Again, this clause leaves room for negotiation. Request the best variable retainage terms you can get. Ask the GC to pay part or all of your retainage upon approval of your work and final payment, rather than upon substantial completion of the entire project.
This is important, especially if you are one of the first contractors on a site. If so, you might not have to wait months or years to get your retention back. Ask the GC if the contract isn’t clear.
Disapproval of payment application
11.1.9: “Upon the partial or entire disapproval by the Contractor of the Subcontractor’s Application for Payment, the Contractor shall provide notice to the Subcontractor. If the Subcontractor disputes the Contractor’s decision regarding a Subcontractor’s Application for Payment in whole or in part, the Subcontractor may submit a Claim in accordance with Article 6. When the basis for the disapproval has been remedied, the Subcontractor shall be paid the amounts withheld.”
The first thing to note in this clause is that it requires the GC to notify you when they are rejecting all or part of your invoice. (Not all GCs do this, so be aware!) This clause also sets out the claim procedure you and the GC must follow if you and the GC disagree about their decision to reject your invoice.
Article 6 states that the parties must try mediation before going to binding arbitration or litigation. Be sure to read that article carefully so you know what the process will be ahead of time.
11.1.10: “Provided the Contractor has fulfilled its payment obligations under the Subcontract Documents, the Subcontractor shall defend and indemnify the Contractor and Owner from all loss, liability, damage, or expense, including reasonable attorney’s fees and litigation expenses, arising out of any lien claim or other claim for payment by any of the Subcontractor’s subcontractors, suppliers, or vendors of any tier. … If approved by the applicable court, when required, the Subcontractor may substitute a surety bond for the property against which the lien or other claim for payment has been asserted.”
The first sentence in this clause means that it only applies if the GC has made all payments to you according to your contract.
This clause basically says that if you don’t pay your subs, suppliers, or vendors, and one of them files a lien, it’s your responsibility. You must cover all costs associated with the removal of the lien. This includes attorney’s fees and litigation costs for the owner.
This clause does give you the option to purchase a surety bond, if approved by the court. The surety bond removes the responsibility for payment from the owner and puts it on you. Then you can work with the sub or vendor to come up with a payment plan or whatever other arrangements you agree on.
You can try to get this clause removed, but it’s highly unlikely that the GC will agree.
Here’s a better idea: Make sure you have an internal process for identifying and paying every subcontractor, supplier, and vendor working under you.
Require preliminary notice – a document stating who they are and what work they’re doing – from everyone at the start of the job.
Request conditional lien waivers with their invoices, or exchange unconditional waivers upon payment. Communicate clearly and often with every party under you on the project, and make sure that you document everything.
Always understand your contract
There you have it – the progress payment clauses from the AIA A401. The most important thing to remember is that you must read your contract, and if you don’t understand something, ask. Do not sign a construction contract that you don’t understand.
It’s always a good idea to consult a construction lawyer before signing a contract.