Getting Paid: Contract Administration and the Payment Process

 

Late and disputed partial payments need never happen. The contract documents should contain procedures for the payment process. Set up procedures early and follow them, and payments will go smoothly.

The Importance of the Schedule of Values

The General Conditions of the Construction Contract by the Engineers Joint Contract Documents Committee (EJCDC) requires the contractor to prepare, for approval, a Schedule of Values. This is a document that details how the contract amount is allocated: How much per yard of excavation? How much for equipment rental? How much per ton of asphalt? Or, if the contract is based on unit prices rather than lump sum, how are the larger items divided into parts for payment?

This document is critical. Yet, so often have I seen the first payment application submitted before the Schedule of Values has even gone for initial review, let alone received approval. The design professional needs time to review and approve the Schedule of Values. Early submittal will facilitate timely payment.

Funding Agency Requirements

Whether the funds for a project come from an owner or a funding agency (bank, bond company, venture capitalist, etc.), there will be requirements that must be met and that can range from fixing a submittal date for payment applications to providing monthly affidavits to attaching specific documents to the payment application. These requirements must be learned and followed.

The design professional's significant responsibilities here include learning what the funding agent or agency requires and setting up procedures at the start of the project to make sure that the money flows smoothly. Most often, having an outside funding agency means that the owner will be able to make draws of money when needed but might be slower to make payments to the contractor by a day or two. Minimizing this delay is an achievable goal.

Measurement and Payment

A good construction specification will indicate how each pay item, in a unit price contract, is to be paid. These terms are called “measurement and payment” and they address questions such as the following:

• Where does one pay item end and another begin?
• What is incidental to each pay item?
• What is closely related to each pay item?
• How is each item to be measured?
• What partial provisions are included so that an item incomplete at the end of a pay period can qualify for partial payment?
• Will payment be made for materials as they are delivered and stored on the site?

Although the measurement and payment terms can take considerable time to prepare, I have found that well worded measurement and payment provisions prevent a multitude of arguments as the contract is administered.

Payment Applications and Documentation

The pay application form, including any documents required each month, should be established at the beginning of the project. The right form, when used correctly by the contractor, really helps with the review by the design professional. Reaching agreement on quantities before the pay application is submitted will result in quicker turnaround. Incorrect completion of payment applications is a huge problem in assuring prompt payment, but good contract administration can have a major positive influence on building relationships and finishing a job without discord.