Payment Provisions National Contracts AIA A-201 and G702/703

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1 Payment Provisions National Contracts AIA A-201 and G702/703 ISBA Construction Contracts Seminar April 7, 2017 By Paul Peterson VP & Senior Underwriter Fidelity Family of Title Insurers National Form Contract Payment Provisions National forms used in all states Designed to determine what to pay the contractor each draw Allows the contractor to pay lower tiers Amount due the contractor is certified by AIA Architect EJCDC Engineer Concensus- Project representative if appointed, otherwise owner 1

2 National Forms Do Not Comply With Illinois Mechanics Lien Act Requirements Illinois requires sworn statements these are the names, addresses and balances due or to become due of subcontractors prior to payment Owner and lender can limit payments only if owner pays, holds back for or ascertains prior payment of disclosed lower tiers Owner may require both national documentation to determine amount due to contractor and obtain statutory statements and make payment pursuant to them. Possible amendment to AIA 201 Notwithstanding any clause to the contrary in the contract documents, A) Owner may directly pay parties claiming under contractor that Owner is given notice of in compliance with local law, with the balance due to the contractor B) As a part of each draw package, in addition to the Certificate and Application for Payment and the Schedule of Values, Contractor shall also furnish owner a statutory contractor s sworn statement in the form in use by the title insurance company insuring Owner and/or Owner s Lender C) As a part of each draw package Contractor shall cause its subcontractors and material suppliers to furnish such waivers of lien and supporting documentation sufficient induce the existing title company to issue its mechanics lien coverage to either the lender or the owner. 2

3 Penalties for Failure to Comply with IMLA Owner can pay twice for same work Weather-Tite, Inc. v. University of St. Francis, 909 N.E.2d 830, 233 Ill.2d 385 (2009) Contractor not entitled to payment and can lose lien rights Deerfield Electric Co., Inc. v. Herbert W. Jaeger & Associates, Inc., 1979, 74 Ill.App.3d 380, 392 N.E.2d 914 Cityline Construction Fire and Water Restoration, Inc. v. Roberts, 2014 IL App (1 st ) Article 9 of the AIA A201 Payments and Completion Schedule of Values Where contract is stipulated sum or Guaranteed Maximum Price, Contractor shall submit Schedule of Values (G703) allocating the entire Contract Sum to the various portions of the work with supporting information Contractor furnishes list of subcontractors within 10 days of commencement 3

4 Article 9 of the AIA A201 Payments and Completion 9.3 Application for Payment Owner shall pay based on Application including supporting documentation and all required lien waivers Draw only if paying subcontractors for subcontractor work Pay for materials only if onsite, unless otherwise agreed re offsite stored material G702 an G703 and supporting data and subcontractor and supplier requisitions due 20 days before established date of progress payment Contractor warrants work paid for on prior applications is lien free Article 9 Certificates of Payment 9.4 Certificates for Payment Architect has 7 days to issue a Certificate for Payment or notify Contractor of issues Certificate of Payment architect represents work has progressed to the point indicated and is in accordance with contract documents, subject to evaluation upon Substantial completion Contractor entitled to payment 4

5 Section 9 Limits on Architect s Certifications Architects Certification (continued) Certification is not a representation of Exhaustive inspections Review of means, methods, techniques, sequences or procedures Review of requisitions from lower tiers How Contractor has used prior payments or who was paid what Section 9 - Additional Certifications? Additional architect certifications? Project on schedule and schedule is reasonable Project on budget Submitted change orders 5

6 Section 9 Withholding Certification 9.5 Decisions to Withhold Certification Architect to notify Owner and Contractor of withholding or nullifying all or part of a prior Certificate if 1. Defective Work not remedied 2 Third party liens or claims 3 Nonpayment to lower tiers 4 Work can not be completed for balance remaining 5 Damage to owner or other contractor 6 Work may not be completed on time and balance due inadequate to cover damages 7 Repeated failure to carry out Work per contract 6

7 Heading identifies Owner (or Contractor) Contractor (or Subcontractor) Project Architect Application Number Period to Contract for Contract Date Project Nos AIA G702 Application and Certificate for Payment AIA G702 Application Amount Filled in after G703 is completed 1 Original CONTRACT SUM 2 Net changes by Change Orders Change Orders are a change in scope, time or money signed by the Owner, Architect and Contractor Does not include rejected, pending, or unsubmitted requests for change orders 3 CONTRACT SUM to date 7

8 AIA G702 Application Amount 4 Total completed and stored to date total of Col G of G703 5 minus Retainage 6 Total earned less retainage (lines 4-5) 7 Less previous Certificates for Payment This is not acknowledging payment of prior Certificates - 8 Current Payment Due - 9 Balance to Finish, including Retainage G 702 Contractor s Certification Contractor certifies to best knowledge Work covered by this Application completed in accordance with contract All amounts have been paid by Contractor for Work which previous Certificates for Payment were issued and payments received by owner Current payment shown herein is now due Certification does not comply with Illinois statutory requirements 8

9 G702 Architects Certificate for Payment Based on onsite observations and data comprising this application, Architect certifies to Owner to best of knowledge, information and belief the Work has progressed as indicated the quality of the work is in accordance with the Contract Documents the Contractor is entitled to payment of the AMOUNT CERTIFIED 9

10 AIA G703 Schedule of Values A Item No. B Description of Work A single work item can include work of multiple subcontractors and supplier(s) C Scheduled Value Column total equals contract amount including approved change orders at Line 3 of G702 Set at start of job Modified by approved Change Order Not designed to equal amount due a particular subcontractor Can include contractor s profit and overhead AIA G703 Schedule of Values D to H are gross amounts pre retainage D Work Completed From Previous Applications E Work Completed This Period F Materials Presently Stored (not in D or E) G Total Completed and Stored to Date (D+E+F) % complete times budget amount for that line item Total of column G is moved to Line 4 of G702 H Balance to Finish (C G) I Retainage 10

11 AIA A105 Residential Contract AIA G702 / 703 Example Excavation and foundation done, deck on Contractor has earned 100% of scheduled value of excavation and foundation from G703 and probably 1/3 rd of scheduled value of carpentry (Column G) Total earned amount from Column G of G703 moved to line 4 (total earned) of G702 Subtract Contractor s retention (line 5) and prior applications (line 7) from total earned to get net payment to contractor this draw on G702 Actual net amount due what subcontractors unstated Lien Waiver Review Issues Scheduled Value for line item not intended to equal contractor s cost for that line item There is no net amount this draw column in G703 Pay this amount this draw is a mathematical calculation Multiple subcontractors possible in any line item Subcontractor costs for a line item expected to vary over the life of the project Need subcontractor invoices to spot subcontractor cost increases 11

12 Lien Waiver Review Issues G702/703 system designed to determine what is due the contractor, not what subcontractors are due what amounts If actual cost of line item on the G703 is lower than budget, contractor pockets difference Higher than budget, contractor pays overage Lien waiver examiner should not only be looking for waivers to the extent of payment but also omitted or understated parties How do you find understated or understated lower tiers with G702/703 when the system does not tell you what subcontractor are due what amounts for what trade line items? Lien Waiver Review Issues Need to add subcontractor and supplier lien waivers required for each draw The Happy Hand Grenades Rule If the trade lien waivers from the prior amount paid to the contractor per the AIA G702 Application for Payment and the AIA G703 Schedule of Values payment system are close to 90% of that amount, hope it will be close enough to do the job Payment and performance bonds, anyone? 12