The Dotted Line: The difference between public and private projects when it comes to resolving payment issues

This feature is a part of “The Dotted Line” series, which takes an in-depth look at the complex legal landscape of the construction industry. To view the entire series, click here.

Disagreements can arise on any size project and over a wide variety of issues. Consultancy firm HKA found in a 2020 report that scope changes drove the majority of construction disputes worldwide, followed by design errors; incomplete design; substandard management of subcontractors and suppliers; unforeseen physical conditions; issuing design information late; deficient workmanship; differences in contract interpretation; and late approvals.

Of the $1.8 trillion of projects that HKA examined, construction disputes cost almost $50 billion and extended job schedules by 71%.

So, it’s safe to say that many private-sector contractors have already dealt with the type of issues that can end up in disputes. However, with a potential federal infrastructure plan in the works, valued at almost $2 trillion, those contractors that specialize in private work could be considering a leap into the public sector as they look for more certainty after a year when the COVID-19 pandemic cast doubt on the viability of some projects and stalled others.

Hand in hand with the new opportunities in the public sector, though, come different rules and processes around some of the areas of disagreement a contractor could encounter and top among these is the issue of payments.

If a dispute over payment on a public project arises — before formal litigation — then there are a few things to keep in mind, said attorney Todd Baxter, chair of the construction practice group at with Dickinson Wright PLLC in Phoenix.

First, he said, many governmental entities have a more thorough administrative process that must be followed before being able to move the payment issue to litigation, arbitration or whatever the formal dispute resolution process may be, and to preserve the claim.

There are also no lien rights, he said.

“Contractors who do mostly private work are probably used to having rights to lien the property if they’re not paid, and they don’t get to do that on a public project,” Baxter said.

Subcontractor issues

Subcontractors that have a contract with the prime contractor are in a better position when it comes to payment disputes, said attorney Lisa Colon, partner in Saul Ewing Arnstein & Lehr’s Fort Lauderdale, Florida, office, because the prime contractors that hire them are required to obtain performance and payment surety bonds that cover nonpayment and nonperformance. The federal Miller Act requires that prime contractors with contracts of $150,000 or more furnish both performance and payment bonds, and states also have their own versions — Little Miller Acts — of the regulation.

Prime contractors, she said, have no such security.

However, said attorney Michael Branca, managing partner at Peckar & Abramson PC’s Washington, D.C., office, the federal government and many states have enacted prompt payment laws, which protect those prime contractors and their subcontractors as well.

Under federal law, payment of an invoice, according to the Treasury Department, is considered on time if it is paid:

• According to a date specified in the contract.
• In accordance with accepted discount terms.
• On an accelerated schedule (under certain conditions) or
• 30 days after the federal agency has received a “proper invoice.”

It’s important to note that if the invoice does not contain all the required information, it is not considered “proper.”

Contractors should also take note, Branca said, that unlike private projects, when contractors make their applications for payment, they are attesting to the accuracy of the items on that application.

Knowingly submitting false claims for payment under the federal False Claims Act could make a contractor liable for three times the government’s damages and a civil penalty of up to $10,000 per false claim. Most states have their own versions of this regulation as well.

The takeaway for prime contractors when it comes to payment, though, is that they don’t have the same security mechanisms provided by either a lien on a private project or payment bonds that protect subcontractors, Baxter said.

____________________________________________________________

The Dotted Line series is brought to you by AIA Contract Documents®, a recognized leader in design and construction contracts. To learn more about their 200+ contracts, and to access free resources, visit their website here. AIA Contract Documents has no influence over Construction Dive’s coverage within the articles, and content does not reflect the views or opinions of The American Institute of Architects, AIA Contract Documents or its employees.