Construction Payment: When Contractors Are Legally Entitled to Get Paid

Unlike general contracts where payment is often tied only to a single delivery, construction payment is almost always incremental. This is because construction projects are capital intensive and carry long timelines. A construction contract usually provides for periodic payments based on the percentage of work completed. This structure is designed to share the financial risk between the owner and the contractor, but it also creates numerous points of friction where a payment dispute can arise.

The legal right to receive payment extends beyond the general contractor. Under U.S. Law, subcontractors, sub subcontractors, and even material suppliers have specific rights to construction payment. These rights are often protected by state laws that allow these lower tier parties to seek payment even if they do not have a direct contract with the owner. This is a unique feature of construction law that requires careful management of notice and documentation.

Most projects rely on a progress payment schedule. This means the contractor submits a payment application at regular intervals, typically monthly, for the work performed during that period. For the payment to be legally due, the work must meet the quality standards and milestones defined in the construction contract. If the architect or project manager refuses to certify the work, the payment remains technically unearned, regardless of how much labor was expended.

The final construction payment is usually the most contested. It is typically due only after the project reaches "substantial completion," which means the owner can use the building for its intended purpose. However, substantial completion is not the same as total completion. The final payment often includes the release of retainage, which is a percentage of the contract price withheld by the owner to ensure the contractor finishes every item on the punch list.

These are risk shifting provisions that are critical in subcontractor agreements.

• Pay-if-Paid Clause: 

This makes the owner's payment to the general contractor a condition precedent to the subcontractor's payment. If the owner never pays the GC, the GC theoretically has no legal obligation to pay the subcontractor.

• Pay-when-Paid Clause: 

This is a timing provision. It suggests that the GC will pay the subcontractor once they receive funds from the owner, but it does not permanently excuse the GC from the payment obligation if the owner fails to pay. Many states have strict rules or even total bans on pay-if-paid clause enforcement, viewing them as a violation of public policy.

Retainage is a common practice where the owner holds back five to ten percent of each progress payment. While this protects the owner, it places a significant financial burden on the contractor. Disputes often arise over when this money must be released and whether it can be withheld to cover unrelated claims or minor defects. Forensic review of the contract is necessary to determine if the withholding is lawful or a breach of the construction contract.

A failure to make a timely construction payment is a material breach of contract. For the contractor, this may provide a legal right to stop work. However, stopping work is a high risk move. If a court later finds that the payment was not actually due (perhaps because of a valid setoff for defects), the contractor could be liable for massive delay damages. This is why a clinical assessment of the payment obligation is required before any work stoppage.

Most modern contracts require a "Notice of Nonpayment" and a specific cure period before any legal action or work stoppage can occur. Failure to follow these procedural rails can be fatal to an otherwise valid claim. In a payment dispute, the court will look first at whether the claimant followed the exact notice provisions laid out in the construction contract.

The most direct path is a civil lawsuit for breach of contract. This seeks a money judgment for the unpaid balance plus interest. Many construction contracts also include an attorney fees provision, allowing the winning party to recover their legal costs. However, litigation is slow and may not be the most efficient path for a company facing a cash flow crisis.

This is the most powerful remedy in construction law. A mechanics' lien is a legal claim against the actual real estate where the work was performed. It essentially "clouds" the title, making it impossible for the owner to sell or refinance the property without paying the contractor.

• Private Projects: 
• Use the mechanics' lien process.
• Public Projects: 
• You cannot place a lien on a government building. Instead, you make a claim against a payment bond provided by a surety company. These remedies have very strict deadlines, often requiring notice within thirty to ninety days of the last day worked.

Under the doctrine of substantial completion, a contractor is entitled to the contract price minus the cost to repair minor defects. An owner cannot legally withhold the entire construction payment because of a few unpainted walls or a missing door handle. If the work is substantially complete, the payment obligation remains active for the bulk of the contract sum.

If the work is truly defective, the owner may be entitled to a "setoff"—deducting the repair cost from the construction payment. However, the owner must document the defect forensically and provide the contractor an opportunity to fix the issue. If the owner hires another firm to fix the work without giving the original contractor a chance to cure, the owner may lose the right to withhold the funds.