Construction Corner

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California Construction Payments - Timing Of Progress Payments

By: Brian R. Dierzé

Progress payments in the construction world are rooted in an incremental approach to a construction project. Instead of a lump sum payment upon completion of the project, progress payments are partial payments made to a contractor after the completion of a predefined stage of the work. These types of payments are provided for in the contract between the project owner and contractor, and help contractors recover and pay for a portion of their costs during the construction project. They also give project owners a chance to assess whether the billed portion of work has been completed satisfactorily before the project proceeds.

Various methods can be used in a contract to designate when and how progress payments are due. The payments may be based on a percentage of the overall scope completed as the work progresses based on a schedule of values (lump sum contract) or payments may be made based on a cost of the work (typically a cost of the work plus a fee with a guaranteed maximum price). Progress payments can also be keyed to the completion of a specific stages of the project, such as when roofing and electrical systems have been put in place, although this is much less common.

The precise format and method of progress payments must be articulated clearly in the contract between the project owner and contractor. Project owners should determine the timing of these payments before a project starts, keeping in mind that too long of a payment period could stall the project, while too short of a payment period could create administrative difficulty with timely review and processing. Per Section 8800 of the California Civil Code, unless otherwise agreed in writing, the project owner must pay the contractor “any progress payment due as to which there is no good faith dispute between them … within 30 days after notice demanding payment pursuant to the contract is given.” This 30 day time period is a good balance.

From the above statute, unless the parties agree otherwise in the contract, progress payments must be made by the project owner within 30 days of notice from the contractor. Typically, notice comes in the form of a Request for Payment Application. The contract should provide detailed information that the contractor must provide in connection with its applications for payment so that the project owner can assess the progress of the project, project expenditures, and payments to subcontractors.

It should be noted that if a project owner violates the terms of Civil Code Section 8800 they can be penalized at two percent per month, in lieu of interest, on the amount wrongfully withheld. Further, in any action to collect amounts wrongfully withheld, the prevailing party may collect reasonable attorney’s fees.

A project owner and contractor should draft a clear contract detailing how progress payments will be invoiced, requirements for submission of pay applications, timing of payment, and reasons that payment may be withheld in order to minimize payment disputes and keep the project moving.

Change Orders – Over Budget – How Did This Happen!

By: Abigail Clark

A change order is a modification to an existing construction contract that changes the original project scope by either adding or deducting scope, which potentially impacts project time and contract costs.

Change orders are the most frequent cause of cost overruns for construction projects, and frustrating for many owners who strive to keep projects on time, and on budget. However, a clear understanding of why change orders occur, and careful planning, can help reduce the need for change orders and keep your project on track.

Change orders occur for a variety of reasons, including unforeseen conditions such as underground differing site conditions, weather delays, inaccurate architectural plans, unanticipated increases in the costs of labor or materials, lack of experienced construction personnel, and design changes.

Although sometimes a change order is unavoidable, understanding potential causes of change orders and advance planning during preconstruction can help minimize issues during the project. A project team who anticipates problems can address them upfront in the project design, timeline, budget, environmental assessment, and contract drafting. Some best practices include the following:

• Assess the nature of your project: Certain construction projects are more likely to generate change orders because some conditions cannot be anticipated until you put shovel to dirt. For example, laying a parking lot without significant grading is not a project that is likely to generate change orders. However, creating a building with an underground parking lot has the potential to encounter significant unforeseen underground differing site conditions. It is important for the latter project to conduct a thorough site investigation, utility survey and geotechnical assessment to help identify potential issues or surprises.

• Understand what you want to accomplish with your project: Sometimes change orders occur because the organization has not spoken to key constituencies to confirm everyone agrees about project goals and objectives. It is important to seek out input from the organization’s board and senior leadership, such as a real estate development or facilities director, before the project begins to confirm everyone is on the same page.

• Hire experienced and skilled personnel: It is important to hire an experienced contractor and architect who understand how to properly plan and budget for a construction project. Experienced project personnel can also help anticipate and plan for any delays, including scheduling long lead times for certain materials.

• Integrate Project Delivery: Frequently, contractors attempt to blame the architect when change orders arise citing errors and omissions in the architectural plans and specs. One way to avoid this is to hire a contractor who will perform pre-construction work to ensure that your architect and contractor work together from the beginning of the project, and coordinate project delivery.

• Allow for Contingencies in Your Construction Plan: A well-planned construction project should anticipate weather delays, allow for unforeseen conditions, and may offer alternatives, which the parties can agree upon as the project progresses. For example, weather frequently impacts a construction project. It is smart to include a certain number of rain or snow days in the contract to account for weather related delays.

• Establish a Change Order Procedure: The contract documents should establish a formal change order application and approval process, which can streamline the handling of potential changes, thereby reducing their overall project impact.