Getting Progress Payments and How to Properly Suspend Work
Every subcontractor encounters the situation where he is not receiving timely progress payments. Suspending your work can be a powerful tool to get paid. However, knowing when and how to comply with your contract before suspending work is crucial. Properly suspending work will preserve your rights to payment for the work completed, unused material delivered, and lost profits. Improperly suspending work will not only place these rights in jeopardy, but expose you to substantial liability for the often exorbitant backcharges, completion subcontractor charges, delay charges, liquidated damages, and general contractor overhead charges.
A Successful Suspension
The case of B & C Electrical v. Pullman Bank and Talsma Builders, 97 Ill.App. 3d 321 (1981) illustrates the importance of suspending work properly. B & C, the subcontractor, stopped work when it was not receiving progress payments. It sued for about $97,000 for its completed work, unused material delivered, and lost profits. Talsma, the general contractor, counter-sued for completion subcontractor charges of $395,000, less the contract balance of $113,000, representing a net claim of $282,000. At issue was a swing of $379,000, the difference between obtaining a judgment of $97,000 versus owing a judgment for $262,000. Fortunately for B & C, the Court found it complied with its contract terms and rightfully suspended its work. Significantly, there were no contract provisions limiting B & C's right to suspend its work in response to the failure to make the contract progress payments. Thus, the Court awarded B & C a judgment for most of its claim and the counter claim was denied.
A Disastrous Suspension
In contrast, is the case of Ziegler v. Chicago Northwestern, 71 Ill.App.3d 276 (1979). Ziegler, a plumbing contractor, suspended its work when some of its claims for extras were not paid. Ziegler then sued for $52,000 for work to date, $58,000 for material furnished to the job but not used, and $30,000 for anticipated profits. The Court found that Ziegler's claims for most of the extras were not valid. The Court determined that under the reasonable interpretation of the contract, the claimed extras were Ziegler's responsibility. Therefore, Ziegler's suspension of the work was a breach of contract. Because Ziegler breached its contract, it could not recover for the unused material and lost profits. The Court did award Ziegler the value of the work it did perform.
Although not discussed, Ziegler, as the breaching party, would also have been responsible for the cost of completion less the contract balance. Often, the completion contractor's cost is the real "killer." Furthermore, a subcontractor will lose his Mechanic's Lien rights if his wrongful suspension of work results in his failure to substantially perform.
A Best Practice
Common law gives the subcontractor a right to suspend work, if progress payments are not made when due. However, your contract can alter that right. The best practice is to carefully examine the contract before you sign it. Make sure it clearly states the timing and rights to progress payments. Do not agree to any provision limiting your right to suspend work.
Suspending Your Work
Once the contract is signed and the general contractor has failed to make a progress payment you have the right to suspend work absent a contract provision to the contrary. Before you suspend work, examine your contract to make sure you are entitled to payment. For example, look for provisions that might restrict your rights to payment or suspend work. Find out if the general contractor has been paid or if the general contractor contends the owner is wrongfully withholding payment. Are the extras you claim authorized or requested in writing by the general contractor and beyond the scope of the original contract?
You should also check the contract for "pay if paid" and "pay when paid" provisions. In Illinois, "pay when paid" and "pay if paid" provisions are not a defense to a Mechanics Lien Foreclosure suit, but they may be a defense to a contract action against the general contractor. Check your contract for any notice provisions for suspension and/or termination of work. Also, make sure that you have provided the insurance certificates required by your contract.
Suspending your work when you have failed to comply with your contract provisions may result in not receiving payment for your work and, in addition, paying a substantial judgment for the completion contractor. You may also be liable for any additional damages provided in your contract. Careful analysis of your contract obligations and rights before you suspend work should save you from a financial disaster.
Before suspending work review your contract with an attorney experienced in construction law to make sure you are protecting your right to payment.
Prepared by Michael T. Nigro
All copyrights reserved: Michael T. Nigro: published in ASA Chicago Construction News, September 2003.
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