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Administering Progress Payments

Sunday, October 03, 2004 02:54 pm

Administering Progress Payments

Progress payments are crucial for construction contractors and subcontractors. The industry has long recognized the need for incremental payments, given the large capital requirements and extended performance periods of many projects. If a contractor had to achieve substantial completion before receiving any payment, only the most heavily capitalized companies could participate.

The right of a contractor or subcontractor to periodic progress payments is established in the contract documents. An example of a comprehensive progress payment provision is found in Article 9 of AIA Document A210, General Conditions of the Contract for Construction.

After the award of the contract, but prior to the first application for a progress payment, the contractor must submit a proposed schedule of values to the architect. This schedule assigns monetary values to discrete portions of the work, in effect subdividing the fixed-price contract. The values should be substantiated by cost data. Once approved by the architect, the schedule of values will serve as an objective standard by which the architect will measure the percentage of completion and the value of the work in place. In this manner, the contractor can receive periodic payments for the work it has performed, less retainage, and the project owner can avoid paying for work it has not yet received.

Unfortunately, not all contracts are as detailed as AIA Document A201 in the treatment of progress payments. Considering the importance of the matter, some are shockingly vague. One contract said, "Payment will be made at 90 percent upon completion of the work with the ten percent balance being released when work is accepted by the appropriate agency and/or accepted by owner."

An Indiana court interpreted this ambiguous provision by relying on industry custom. Periodic progress payments are so prevalent in the industry that it could not have been the intent of the parties to make the contractor wait until 90 percent completion to receive any payment. Abbey Villas Development Corp. v. Site Contractors, Inc., 716 N.E.2d 91 (Ind.App. 1999); CCM December 1999, p. 7.

This sort of vague and imprecise language is also common with regard to determining progress payment amounts. On residential projects, a contractor's "draw"can be tied to discernible milestones in the construction. For unit-priced work, objective quantity measurements are possible. But on a fixed-price construction project of some complexity and magnitude, the determination of the amount of periodic progress payments can be a contentious process.

Determining the Amount

Some contracts simply give the project owner the right to determine the value of completed work. One contract called for the owner to prepare bi-weekly estimates of the percentage of completion. This was binding on both parties for purposes of calculating progress payments. Midwest Bridge Co. v. Michigan Department of Transportation, 350 N.W.2d 913 (Mich.App. 1984); CCM October 1984, p. 4.

Another contract gave the project owner the right to u [...]

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