CORNERSTONE - The Associated General Contractors of New York ...

AGC NYS CORNERSTONE Winter 2011
24
Life Blood Continued from P.19
While these provisions are not, on their face, offensive or
out of line with good industry practice, the most troublesome
part of the law is part of the most recent changes. It allows
for the contractor or subcontractor to submit the claim of a
violation of the law to binding arbitration administered by
AAA (American Arbitration Association). There may be
many legal questions as to the enforceability of this provision.
With that said, however, I am concerned that a disgruntled
subcontractor may place a general contractor in a
precarious situation between the claim risk and his relationship
with a client.
Pay When Paid – While I don’t wish to get into great detail
about the lien law (AGC NYS has a Guidance Document), it
is important to discuss briefly the “West-Fair” case as it relates
to payments to subcontractors. Suffice it to say that the
decision in the case holds for the proposition that contingent
payment/“pay-if-paid” clauses in contractor/subcontractor
agreements in New York State are void and unenforceable as
being violative of Section 34 of the Lien Law. Should you
cling to such provision in your contract, it may render all the
protections you otherwise have in the payment provisions
moot. What is allowed in New York State are “pay-whenpaid”
clauses. The somewhat unanswered question relates
to how long “when” is. Many have sought to require subcontractors
to exhaust their lien rights while others, such as
ConsensusDOCS 750 have simply relied on the term “reasonable.”
I would submit that Article 35-E of General Business
Law may answer the question or, at least, provide the
remedy.
Best Practice
With all that as background, the question is this – what is
considered “good industry practice” when it comes to payment
provisions? For that, I would suggest you look to
the payment provisions found in ConsensusDOCS. While
similar, if identical, provisions are found in the other ConsensusDOCS
contracts, I am focusing on those found in Articles
4 and 9 of ConsensusDOCS 200 (Owner/Contractor
Agreement) and Articles 4 and 8 of ConsensusDOCS 750
(Contractor/Subcontractor Agreement). I cite these because
they have been negotiated and endorsed by owner, contractor,
subcontractor and surety organizations, a reading of the
clauses confirm their fairness and good common sense and
because, the AIA documents no longer represent the level
of fairness on the payment provisions that they once did.
Without citing each and every clause, below is a list of the
key provisions:
• Owner is obligated to provide continuous proof to the contractor
(and contractor in turn is to provide such information
to the subcontractors) of the owners’ ability to finance and
pay for the work. (For guidelines and language on this, review
ConsensusDOCS 290 and 290.1)
• Retainage percentage is not stipulated. It is a fill in the
blank portion. 10% is not uncommon given the next point.
• Reduction in retainage to zero upon satisfactory performance.
Each subcontractor would be subject to the same
opportunity.
• Ability to substitute negotiable securities for retainage.
• Opportunity for early release of retainage for early finishing
subcontractors and for partial use or occupancy.
• Payment for stored materials.
• Payment to contractor made within 20 days of application.
• Payment made to subcontractor within seven days of payment
to general contractor
• Ability to stop work after seven days notice which can be
made if payment is seven days late. This applies to subcontractors
as well.
• Interest on late final payment.
As stated above, the payment process that maintains regular
positive cash flow is critical to project success. Unnecessary
strictures in the payment process are likely to have a negative
impact on schedule, performance, reaction to owner
needs and, over the long term, price. The list of best practices
noted above are guidelines. In some cases, however,
even more aggressive processes such as payment every two
weeks, may be warranted.
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