A contractor promptly paid is a productive contractor. An industry truism tells the tale: "The contractor is not a banker." Payment issues such as timeliness, frequency, availability of funds, or retainage can all have a significant impact on competition and performance. Payment procedures outlined in the several AGC and AIA standard documents, endorsed by prime and subcontractor alike, are instructive. In additions, there are several legal issues in New York State which govern public and private work in a variety of ways. The various issues surrounding payment are discussed below.

OWNER ABILITY TO PAY: Article 2.2 of the AIA set of general conditions, A201, is instructive in that it affords contractors the ability to request and receive of owners "reasonable evidence that financial arrangements have been made to fulfill the Owner’s obligations under the Contract." Such a practice is recommended in order that both the contractor and his surety may be given comfort that he has not entered into an unmanageably risky situation.

This is now truer than ever given the West-Fair case, which holds that subcontractors are to rely not on the credit of the owner, but rather on the credit of the prime contractor. Not only is there a need for contractors and their sureties to obtain that information at the beginning of the project, but also from time to time as concerns arise or change orders are considered.

Public Work Consideration: A standard clause found in public work contracts states that the "contract is deemed executory to the extent funds are available." Attempts have been made by some public owners to portray the clause as allowing for unjust enrichment. Where change orders have been duly executed and approved by the public owner and then performed by the contractor, attempts to invoke that clause as reason not to pay the contractor have been thwarted by the courts.

PROMPT PAYMENT: As stated above, a promptly paid contractor is a productive contractor. As matters flow, slow payments to the contractor will beget slow payments to subcontractors. All this will negatively impact on the ability to staff the project and to procure materials and equipment. Given circumstances and proper guarantees, consideration should be given to payment for stored materials. Standard practice holds 30 days from application to be the absolute maximum. As technology improves, owners who have opted for electronic transfers in 2-3 days have found tremendous benefit to their projects.

Public Work Considerations: For most public work in New York State, the governing body of law is §106-b of General Municipal Law. It dictates that within 30 days of a contractor requisition duly presented to the owner or his agent (designer or CM), payment must be made to the contractor. For every day beyond that 30-day mark payment is not made, interest will accrue for the benefit of the contractor. Many enlightened owners will automatically attach the interest to late payments. Such attachment serves as a check against the practice of late payments becoming a habit. It also speaks to the goodwill of the owner. Similarly, the contractor has 15 days following receipt of payment from the owner to pay the subcontractor.

RETAINAGE: A common practice in the industry is for a percentage of each progress payment to be held as retainage. This retainage is meant as an inducement to perform to plans and specs and to pay those below them. It is important that the retainage is not confiscatory and a hindrance to proper performance. The public work requirements noted below are instructive as to percentages.

Public Work Considerations: Section 106-b of General Municipal Law sets forth that where performance and payment bonds are required, the public owner must pay the contractor on progress payments for actual work performed and materials suitably stored less no more than 5% retainage until substantial completion. At that time the owner must promptly pay the balance of the contract less two times the punch list and an amount necessary to satisfy any outstanding claims, liens or judgments. The punch list items are to be paid for as completed. Where performance and payment bonds are not required, no more than 10% may be held as retainage. (Note: In many cases on private work, retainage is reduced to zero upon successful completion of 50% of the work.)

Substitution of Negotiable Securities for Retainage: Section 106, General Municipal Law spells out the rights and responsibilities of the contractor and owner in respect to the substitution of negotiable securities for retainage by the contractor. In most cases, the contractor has the absolute right to substitute.