Architect's Certification of Payments to the Contractor
It Has To Be Done Right. There Is Little Or No Room For Error.
Arthur O'Leary, FAIA, MRIAI
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No duty of an architect is subject to more scrutiny than the issuance of payment certificates. The owner, naturally, does not want to pay money prematurely or needlessly. The contractor, on the other hand, wants, needs, and is entitled to the money as soon as possible. Both owners and contractors are generally acutely aware of the interest value of money.
A second tier of concerned critics hover in the background protecting their interests in the payment. These include lenders, insurers, sureties, subcontractors, subsubcontractors, labor, material suppliers, and manufacturers. All of these entities are surrounded by their expert advisors including lawyers, accountants, architects, engineers, contractors, and numerous other business and construction authorities.
The architect must render this important service carefully, fairly, and timely. Mistakes, sloppiness, or informality in this part of the contract administration process are not readily acceptable to either owner or contractor. Very few mistakes or irregularities will ever slide by unnoticed or unmentioned.
The payment process is set out in the contract (A101 and A201), and the architect's administration of the procedure must be carried out in strict conformance with the contract. When either the owner or contractor request or suggest changes in the procedure, the architect does not have the power to grant or carry out any deviations. The only way the agreed process can be changed is for the owner and contractor to amend the contract. If this is done, it should be in writing and the architect must carry out the changed procedure in strict accordance with the newly agreed instructions.
Schedule of Values
The basis for calculating the owner's progress payments to the contractor is the schedule of values. This is an allocation of the total contract price among each of the segments of the work. It is prepared by the contractor and submitted for the architect's review and approval before the first payment. The contractor must be prepared to substantiate the allocations to whatever degree of accuracy is required by the architect. After it is approved by the architect, it becomes the basis for all the contractor's subsequent applications for payment. (A101, 5.1.4 and A201, 9.2.1)
Front-end Loading of the Schedule of Values. This is the fraudulent practice of overstating the values of the work that will be completed early in the construction process and lessening the values of the work to be done later in the sequence. This has the effect of overpaying the contractor at the beginning of the work, although it evens out by the end of the project. When this is cleverly done, it is very difficult for the architect or owner to detect. The owner should be advised to authorize consultation with a building cost consultant if there is any suspicion of misstated or distorted values. It would be improper for the architect to make unilateral adjustments in the schedule of values since the architect's role is limited to approving or disapproving. If the architect feels that the schedule of values is distorted, the contractor should be asked to produce substantiation for the questioned items. This could be in the form of executed subcontracts or purchase orders.
Applications for Payment
The contractor will submit an application for payment at whatever intervals (usually monthly) are set out in the contract. (A101-1997, Article 5 and A201, 9.3.1) No particular form is required, but AIA Document G702 is very handy for this purpose, as it also includes an Architect's Certificate for Payment. (See Sidebar) AIA Document G703 is a continuation sheet on which to enter the schedule of values, percentages of work completed, and the balance to finish.
The amount of the application will be the sum of the values of all work completed to date, less the agreed retainage, and less all previous payments. (A101, 5.1.6)
The contractor should complete the form and sign it in the presence of a notary public, if notarization is required by the owner. The contractor should also submit any data required by the owner or architect substantiating the contractor's right to payment. (A201, 9.3.1)
After receipt of the payment, the contractor is obligated to pay each subcontractor its proper proportion of the payment. (A201, 9.6.2) This provision may seem idealistic since the owner and architect will not really know how the contractor actually distributes the payment. However, if requested by a subcontractor, the architect is obligated to reveal the amounts that have been paid to the contractor for that subcontractor's work. (A201, 9.6.3) From there, it is up to each subcontractor to look out for its own interests. Some architects and owners require written lien releases from all subcontractors and suppliers whose work is included in the previously approved schedule of values.
Retainage (or retention) is a sum retained by the owner from each payment to the contractor. This is to provide some financial cushion to the owner in the event it is needed to correct the contractor's work or if the contractor defaults and the owner must find other contractors to finish the work of the contract. The retainage is later paid to the contractor after the final submissions have been accepted by the owner. (A201, 9.8.5 and 9.10.2)
The amount or percentage of retainage is not a fixed standard. It is a negotiated amount, usually a percentage of each payment, and is stated in the contract at A101, 5.1.6. Commonly it is ten percent, but can be more or less, anything the owner and contractor may agree to. In some contracts, the retainage is eliminated on the second half of the contract, provided that the work is satisfactory to that point and is not behind schedule. If the retainage is to be reduced or limited during the contract, the formula should be described in the contract at A101, 5.1.8.
When the schedule of values is distorted by front end loading, as described above, the effect will be to eliminate some or all of the owner's retainage protection in the early stages of the job.
If the contract is bonded, any change in the retainage must be consented to by the surety. This consent can be by use of AIA Document G707A, Consent of Surety to Reduction in or Partial Release of Retainage.
The Architect's Certificate
As with the contractor's application for payment, the architect's certificate does not have to be in any particular form. However, the certificate in AIA Document G702/703 contains all the necessary elements in concise language. (See Sidebar)
Concurrent Site Examination. The architect's certificate constitutes a representation to the owner that the work has progressed to the point indicated in the contractor's application, and that the work, to the architect's best knowledge, information, and belief, is in accordance with the contract documents. (A201, 9.4.2) This representation is realistic only if the architect has made a recent site examination, preferably soon after receiving the application.
Percentages of Completion. The value of each line item of completed work on G703 must stand alone. The architect cannot allow an overstated item to offset an understated item of work. Neither can the architect allow an item to be overstated on the date of the certificate on the contractor's promise that it will be up to that point by the time the certificate is paid. The architect can certify only those percentages of completion actually observed on the date of physical observation.
Change Orders and Construction Change Directives are usually added to the end of the schedule of values rather than added to each related line item in the approved schedule. The contractor can then be paid progressively as each of the changes progresses during construction.
Stored Materials - On-Site. The value of materials delivered and suitably stored at the site may be allowed unless the contract has been amended to the contrary. However, this places the burden on the architect to judge whether or not the material is suitably stored. Suitable storage must be judged on the basis that value is not likely to be lost on account of theft or deterioration by the elements. The owner's requirements for establishing title to the stored materials must be complied with. (A201, 9.3.2)
Stored Materials - Off-Site. The value of materials and equipment stored off-site or in fabricator's shops may be included in the certificate only if agreed in advance by the owner. If it is allowed, the owner's interests in regard to title must be protected. (A201, 9.3.2)
Advance Payments to Suppliers. Payments in advance to suppliers can be made only with the owner's prior approval. (A101, 5.1.9). The owner's concern would be in respect to title to the property and some acceptable guarantee that the materials or equipment would eventually be delivered.
Architect's Decision to Withhold Payment. If the architect cannot make the representations required in A201, 9.4.2, then the architect should withhold a certificate for payment to what ever extent is necessary to protect the owner's interests. The architect may also nullify the whole or part of previously approved certificates if necessary to protect the owner from losses for which the contractor is responsible. Examples of potential losses are given in A201, 9.5.1. In the event that the architect cannot certify the payment in full, the owner and contractor must be notified in writing with the reasons stated. (A201, 9.5.1)
Certificate Not an Acceptance of Work. Neither an architect's certificate nor an owner's occupancy of the work constitutes acceptance of work not in accordance with the contract documents. (A201, 9.6.6)
Architect's Records. The architect is required to keep a record of the contractor's applications for payment. (B141, 126.96.36.199) This is a new requirement in the 1997 edition of B141. It is not enough to merely sign the certificates and send them on to the owner for payment. The details of the required record are not specified. Presumably, it would be in writing or on computer, possibly in tabular form, with entries of all relevant dates and amounts. The record should include copies of all contractor's applications for payment and the architect's certificates for payment.
Owner's Progress Payments
Upon receipt of the architect's certificate, the owner is obligated to pay the certified sum to the contractor within the time limits set out in the contract. The owner should notify the architect when the payment is made. (A201, 9.6.1)
Failure of payment. If the architect fails to issue the certificate through no fault of the contractor, or if the owner fails to pay within the time specified, the contractor, after giving the notices required in the contract, is entitled to stop the work until payment has been received. Then, the contractor is entitled to a contract time extension, and to be paid the reasonable costs of shut-down, delay, and start-up, plus interest. (A201, 9.7.1) Interest on late payments is provided for in the contract. (A101, 7.2 and A201, 13.6)
When the contractor submits the final application for payment, the architect should make a final inspection. When the architect is satisfied that the work is acceptable under the terms of the contract documents, and that the contract is fully performed, the architect should issue the final certificate. The certificate should contain certain language as required in A201, 9.10.1. Using the certificate on G702-1992 should suffice. The sum certified, however, will not come due until the contractor submits to the architect the documents listed and described in A201, 9.10.2, consisting of proofs that materials and labor have been paid for and that specified insurance is in effect. (B141, 188.8.131.52)
Normally, the architect's construction administration duties end at the certificate of final completion. (B141, 184.108.40.206)
The final payment constitutes a waiver of claims by the owner except those arising from unsettled liens and other claims arising out of the contract, failure of the work to comply with the contract documents, and terms of specified warranties. (A201, 9.10.4)
Acceptance of the final payment by the contractor constitutes a waiver of all claims except those that were previously made and that remain unresolved. (A201, 9.10.5)
Bonded Contract. When the contract is bonded, the contractor must obtain written consent of the surety for the final payment. (A201, 9.10.3) This may be submitted on AIA Document G707, Consent of Surety to Final Payment. If it is submitted on the surety company's own form or letter, it may be unacceptably conditional rather than in the unconditional language of the AIA form.
For the purpose of illustrating this article, it is assumed that the construction contract consists of the Standard Form of Agreement Between Owner and Contractor (where the basis of payment is a Stipulated Sum), AIA Document A101-1997 along with the General Conditions of the Contract for Construction, AIA Document A201-1997. It is assumed that the architect's services are contracted for under the Standard Form of Agreement Between Owner and Architect, AIA Document B141-1997.
Various provisions of the AIA documents have been paraphrased and abridged for simplicity. The reader is advised to refer to the exact wording of the contract documents before taking any actions.
For additional information on architect's certificates for payment, see Chapter 13, Payment Certifications, in A Guide to Successful Construction - Effective Contract Administration, by Arthur F. O'Leary,
The wording in the following two paragraphs is taken from
Application and Certificate for Payment, AIA, Document G702-1992
Contractor's Application for Payment
The undersigned Contractor certifies that to the best of the Contractor's knowledge, information and belief the Work covered by this Application for Payment has been completed in accordance with the Contract Documents, that all amounts have been paid by the Contractor for Work for which previous Certificates for Payment were issued and payments received from the Owner, and that current payment shown herein is now due.
Architect's Certificate for Payment
In Accordance with the Contract Documents, based on on-site observations and the data comprising this application, the Architect certifies to the Owner that to the best of the Architect's knowledge, information and belief the Work has progressed as indicated, the quality of the Work is in accordance with the Contract Documents, and the Contractor is entitled to payment of the AMOUNT CERTIFIED.
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