Invoicing, Lien Waivers and Failure to Pay Invoices

posted by Michael Fortney  |  Dec 31, 2009 12:51 PM in Construction Law

Developing a schedule of values

A schedule of values is typically required by the contract with the owner.  The schedule should be prepared carefully, with specific and accurate values attached to each component of the work.  The schedule should be submitted prior to the first application for payment, and should be reviewed carefully by the architect to prevent "front end loading" by the contractor.

Invoicing:  application for payment

An application for payment includes (a) the value of work in place, (b) the value of materials stored on site, (c) retainage, (d) amounts previously paid, and (e) the amount due for the present request.  The invoice form should specifically refer to the project, the contract, the contract sum, and any approved adjustments to the contract sum.

If the general contractor invoices for work performed by a subcontractor, the general contractor must pay the subcontractor the amount invoiced to the owner.  If the general contractor does not intend to pay a subcontractor for its work, it is impermissible to invoice the owner for that work.

1. Determining value of work in place

A properly and carefully prepared schedule of values, and good record keeping by the contractor, assist the determination of the value of work in place.  The contractor should keep meticulous records of payroll, supplies, equipment, materials, and overhead to present in the event of a dispute.

The contractor may be required to submit a breakdown of hours, position, and wage rates of employees on the project.  Overtime hours and the reason for overtime should also be tracked.  The contractor should be able to show the cost of labor incurred for each component of work completed.

The cost of supplies should be separately tracked.  Supplies are not incorporated in the project, as materials are.  Equipment rental and/or maintenance should be tracked along with supplies.

Materials used must also be tracked as part of the value of the work in place.  Materials are those that have been incorporated into the project.  

Overhead and profit should also be part of the value of work in place.  Appropriate amounts should be added to the value.

2. Determining the cost of material stored on site

This component of an application for payment is the material stored on site, but not yet incorporated into the project.  This allows the contractor to purchase materials before they are needed, so as to allow construction to proceed without delay.  In some instances, the parties agree that payment will only be made after the materials are incorporated into the project.

3. Retainage

This is usually spelled out in the contract.  If it is not, retainage is not an automatic right.

Architect’s Certification

Typically within seven days of receipt of the payment application, the architect is required to either certify payment of the application or provide reasons for withholding certification.  

Certification by the architect constitutes a representation that the work has progressed to the point invoiced, and that the work has been properly performed to the best of the architect’s knowledge.  The certification is limited regarding the determination of quality or quantity of work, and the review of invoicing from and payments to subcontractors on the project. 

Lien Waivers

1. Partial lien waiver

Upon making progress payments, the owner or general contractor will require the contractor to waive all lien claims that the contractor may have for the work invoiced.  Such partial lien waiver requirements must be contained in the contract.  Partial lien waivers are often used in conjunction with an Affidavit of Contractor.

2. Final lien waiver

Upon completing the job, the contractor must usually complete a final lien waiver.

The Fairness in Contracting Act states that the requirement to sign a final waiver of claims in order to obtain final payment is void and against public policy, if the contractor has asserted a claim or request for an adjustment to the contract price.  Ohio Revised Code §4113.62(B).  No longer will contractors be caught between waiving a previously asserted claim, and getting paid for their work.

Protecting lien rights in contracts and in waivers

Make sure a lien waiver is contingent on payment, either partial or final.  Only waive liens through the date of the invoice, not through the date of the payment.

Look for no lien clauses in your contract, and in the contract with the owner, if that contract is incorporated by reference.  A no lien clause in the contract with the owner may be incorporated into a lower tier contract, if there is incorporation language in the lower tier contract.  Such incorporation language is usually enforced.  If a no lien clause is in the contract, try to negotiate it out of your contract.

Failure to pay payment applications by owner

An owner’s failure to pay payment applications that are clearly due and owing is almost always regarded as a material breach, excusing the contractor from further performance.  In the event that the contract has a procedure to follow in the event of non-payment, the general contractor must follow that procedure in order to exercise its rights for non-payment.  

The payment is not “clearly due and owing” if any of the following apply:

defective work is not remedied

third party claims have been filed or are to be filed

failure of the general contractor to make payments to subcontractors or suppliers

evidence that the work cannot be completed for the balance of the contract sum

evidence that the work will not be completed within the contract time and that the unpaid balance will not be sufficient to cover the resulting damages or liquidated damages 

persistent failure of the general contractor to carry out the work in accordance with the plans and specifications

Refusal by the owner to pay puts the general contractor in a dilemma – is the payment “clearly due and owing”, and is the general contractor therefore entitled to stop the work, or must the general contractor continue the work under the contract and pursue its claims against the owner, as the contract contemplates.

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