A project is moving smoothly and the deadline arrives for the owner to make its next progress payment, which never comes. What does the contractor do when the owner stops making progress payments? The contractor has two options: it can either continue to perform the work or cease the work, neither of which is a perfect solution.
Many construction contracts provide for “progress payments” – periodic payments made by the owner to the contractor at set times throughout the project. Progress payments are typically calculated using a schedule of values that allocates estimated costs to various portions of the work. Having such a schedule benefits the contractor, who avoids having to finance the project itself and has an expectation as to when payments will be received.
The owner’s failure to pay progress payments that are “clearly due and owing” generally entitles the contractor to stop work until the progress payment is made. While this rule seems clear, it is not that simple. The contractor’s right to stop work at a later time may be waived if the contractor continues to perform despite the missed progress payment. On the other hand, if the contractor stops work and it is determined the owner was not in breach of the contract, the contractor may be liable for damages the owner suffered from the contractor ceasing its work. The contractor should look to its contract with the owner to find answers to the following two questions:
- Does the contract require the contractor to take a certain action?
The contractor should review the payment, suspension and termination provisions of the contract to determine if they require a certain action. If the contract expressly states that the contractor must give notice of intention to stop work, the contractor must do so or it will be in breach of contract. Many contracts require the contractor to continue performance despite any ongoing dispute, even those that relate to payment. The contractor should consider the consequences if it does not make payment to its subcontractors – its failure to pay its subcontractors, despite not being paid by the owner, could be a breach of its contract with the owner and its contract with the subcontractors.
- Is payment “clearly due and owing?”
If a progress payment is not “clearly due and owing,” the owner will not be held in breach of contract. The contract likely provides a variety of situations in which the owner can withhold payment from the contractor. These may include:
- Defective work not remedied
- Claims filed by a third-party
- Failure of the contractor to pay its subcontractors
- Reasonable evidence that the work cannot be completed for the remainder of the contract sum
- Damage to the owner or another contractor
- Reasonable evidence that the work will not be completed within the contract time, and the unpaid balance is not enough to cover damages for the anticipated delay
- Persistent failure to carry out the work in accordance with the contract
Some of these grounds are easier for the owner to argue than others, such as defective work not remedied. In any event, the owner should only withhold that portion of the progress payment that corresponds to its reason for withholding. For example, if the owner is withholding payment because it does not believe the contractor is paying its subcontractors, the owner must know the actual amounts due to these entities and should only withhold such amounts.
A careful review of the contract will help the contractor determine whether the progress payment is clearly due and owing and take the appropriate steps to avoid breaching the contract. For more information about the payment process in construction contracts, see Chapter Eight of Bruner & O’Connor on Construction Law.