Catch 22: Withholding Payment Certifications

by Jim Atkins, FAIA, and Grant A. Simpson, FAIA

Summary: Okay, let me see if I got this straight. In order to be grounded I've got to be crazy, and I must be crazy to keep flying missions. But, if I ask to be grounded that means I'm not crazy anymore, and I have to keep flying.
—Captain Yossarian, Catch 22, the movie.

Your project is now over six months past scheduled completion. You have scrutinized the “Balance to Finish” amount on each G702 Application for Payment since the originally scheduled completion, carefully deciding in reasonable professional judgment if it is enough to complete the project. You have watched the balance diminish month after month, and today, after careful consideration, you have decided that the balance may not be sufficient to pay for the work remaining.

As a precaution, you had your cost estimating consultant drop by the job after you e-mailed him a PDF of the payment application. You give him a call to find out what he thinks about the situation. He takes the position that the balance to complete will definitely not cover the work remaining for completion.

The requirements of AIA Document A201™–2007, General Conditions of the Contract for Construction, Section 9.5.1 are clear:

“… The Architect may also withhold a Certificate for Payment or … may nullify the whole or a part of a Certificate for Payment previously issued … to protect the Owner from loss … because of:

.4 reasonable evidence that the Work cannot be completed for the unpaid balance of the Contract Sum.
.6 reasonable evidence that the Work will not be completed within the Contract Time, and that the unpaid balance would not be adequate to cover actual or liquidated damages for the anticipated delay”

You ask yourself, what other means are available to protect the owner other than refusing to certify payment? The contractor has been non-responsive to your requests for his plan of action for recovery and has not increased the workforce or extended working hours.

When you mentioned to the contractor that you may be forced to withhold certification, he became angry and said he would pull off the job. On the other hand, you realize that approving payment will likely place the owner in a precarious position; one that could result in an incomplete project with virtually all funds disbursed. What are you to do? What is the solution? If you have been in this position, you know that the outcome is not going to be pretty.

This article is about the unfortunate dilemma that can arise when a project experiences a lengthy delay. It is a situation where you may not emerge unscathed—no matter which decision you make. It can be a self-defeating course of action, much like the fate of Alan Arkin’s character, Yossarian, in the 1970s movie, Catch 22. Your objective is to protect the owner, but either outcome usually does not provide a happy ending.

The game
When the construction phase starts, money begins to move. Work is put in place with the contracted anticipation that payment will be made within a certain period of time. Certification of the contractor’s applications for payment is a typical part of the architect’s construction phase services.

The architect visits the site, probably on a monthly basis or perhaps more often, to observe the work and compare the contractor’s applications for payment with the work completed and the work in progress. Based on the contractor’s sworn certification that the application is correct and is a true and accurate representation of work completed and materials stored, the architect certifies payment. Should the architect disagree with the contractor’s representation, the architect is empowered by A201 to certify only a portion of the application, rescind certification on previous applications, or not certify at all.

The timing for the architect’s certification is critical in that outstanding labor and material costs must be paid, and a relatively short time limit for certification is usually required in the General Conditions. Contractors often threaten to stop work and possibly file a lien against the property if payment is delayed or stops altogether.

Damned if you do

Open your eyes, Clevinger … It doesn't make a damned bit of difference who wins the war to someone who's dead.
—Captain Yossarian, Catch 22, the movie.

Payments are timely on most projects, and delays in payment are not usually significant enough to adversely affect the work. However, should a delay in construction or payments span over many months, a problem could ultimately arise with line 9 on AIA Document G702, Application and Certificate for Payment. Line 9 is the “Balance to Finish, Including Retainage.“ One of the considerations of the architect is whether this amount is sufficient to pay for the work remaining.

This task is usually undertaken with the assumption that a different contractor will be completing the work. However, the retainage in the amount is for work already completed, and this “cushion” typically is enough to pay the premium required to bring in a new contractor.

The problem that arises with extended delays is that eventually Line 9, Balance to Finish, can become insufficient for completing the work; even with the retainage. When this occurs, the architect is faced with a dilemma. If the architect continues to certify payments, the balance to finish will eventually diminish to the remaining retainage total only. If the work is not completed by this time, the contractor will likely apply for the retainage amount to pay for the work. You can see where this is heading. It is not a good thing.

When a contractor is extremely late in completing a project, it is usually because of one or more of the following reasons.

• The contractor underestimated the time required for construction
• The contractor was unable to plan and execute the work timely
• The schedule of values contains inaccurate or unrealistic amounts
• Circumstances beyond the contractor’s control have caused delays.

Should the contractor fall behind in work progress, the General Conditions require him or her to provide the architect and owner with a plan for recovering the work schedule. This could include extended work days or hours and/or additional workers. Since the contractor is likely already in trouble with costs, the additional labor burden only increases the contractor’s losses. Projects with extended delays caused by the contractor will only survive completion if the contractor is willing and financially able to work without payment for as long as it takes to complete the project.

On the other hand, if the delay is caused by circumstances beyond the contractor’s control, an agreed-upon extension of contract time and sum is in order. But this circumstance is not the topic of this article.

We will examine two projects that experienced lengthy delays in completion caused by the contractor. Both case studies ended with the architect paying out a large sum of money through their professional liability insurance policy.

Case Study No. 1: Build First, Coordinate Later

As I understand it, we're presenting these men with medals for doing a lousy job. Is that right?
—Gen. Dreedle, Catch 22, the movie.

The first project involved a contractor that was the low bidder on a replacement hospital. The contractor had experience in both health-care facilities and office buildings, but the contractor’s regional office that was scheduled to build the building had only office building experience.

The contractor brought in an experienced health-care project manager from another region to attend the job interview. However, they had people available in their region to do the work, and when they were awarded the project; they elected to use a project manager with no health-care experience.

They began work and the concrete frame topped out early. They were known for how fast they could frame up a concrete structure. However, when they began the building infill, they failed to coordinate the mechanical work and the drywall work, a key requirement for health-care facilities in which extensive mechanical work in the ceiling plenum space of the hallways must be carefully coordinated with the rated walls on each side in order for everything to fit.

The mechanical subcontractor was a big company who had a longstanding relationship with the general contractor, and the drywall subcontractor was a small local whom the hospital knew and wanted to use. With the contractor’s approval, the mechanical subcontractor moved quickly through the project installing ductwork and piping ahead of the drywall subcontractor. The activities of the two trades should have been coordinated because the drywall and the mechanical required a sequential installation.

The drywall sub was unable to install the drywall efficiently behind the mechanical sub’s work in the restricted ceiling space of the hallways. The general contractor’s team was accustomed to having the mechanical take the lead in office building construction, and they saw no reason to be overly concerned about coordinating the work of the two subcontractors, which is a critical requirement in health-care projects. The drywall sub continued unsuccessfully with their attempts to install drywall in the inaccessible locations, and at 21 months into a 30-month project, after having expended the cost of their contract, they declared bankruptcy and sued the general contractor.

The general contractor was never able to recover their failing schedule. When they reached the point where there was an insufficient balance to pay for the work remaining, the architect began declining to certify payment. The contractor stopped the work, and the hospital terminated their contract. The contractor immediately sued the hospital for wrongful termination.

Another general contractor was brought in to complete the work, but due to a lengthy shutdown and start-up, the project experienced a one-year delay in completion. The delay proved to be quite expensive for the owner. The completing contractor charged a premium to finish the work, and the hospital had to sustain the labor burden of newly hired staff for the additional year.

When discovery and depositions began, the contractor attacked the architect’s drawings, alleging that they were incomplete and full of errors. They maintained that the drywall subcontractor went bankrupt because they couldn’t build from the drawings, not because their work was not coordinated with the other subcontractors on the project.

The architect settled the lawsuit by paying well above their deductible. Their fees for the additional year spent providing construction administration were forgiven as a condition of settlement.

It is a tough decision when you must decide to withhold certification. However, the alternative of certifying payments until the balance is exhausted also carries increased risk to the architect. It is a situation over which you have little or no control, and you will likely be penalized with either course of action. It is without question a Catch 22, and you will be damned if you do, and damned if you don’t.

Case Study No. 2: Multi-Primes Taking Their Own Sweet Time

You can't let crazy people decide whether you are crazy or not.
—Capt. "Doc" Daneeka, MD, Catch 22, the movie.

The second case study involves a multi-prime contract on an office building where a general contractor held a contract for architectural and structural construction elements and the mechanical, electrical, and plumbing construction elements were contracted to separate subcontractor primes. The general contractor had the position of “coordinating prime,” and was required by contract to coordinate the work of all the primes.

The coordinating prime never really had control of the project. They were late in topping out the building frame, and the building was not completely closed in at the time of substantial completion. The project schedule called for a three-year completion, and at 18 months into the project, the contractor announced that they were 6 months behind schedule, citing problems with the architect’s drawings and interference of their work by the other primes. The owner requested that the design team increase their construction phase services to accommodate the contractors’ needs.

The schedule continued to erode as time passed. At three years into construction, the coordinating contractor announced that they were one year behind schedule. At the end of four years, the owner agreed to complete portions of the project that were still not completed so that the building could be occupied. A hard rain fell on grand opening day, and water poured on the celebration inside the building.

The architect began withholding certification of payment about the time the project was originally scheduled to complete. The primes continued to work on the project, but they reduced their workforces to small crews, thus extending the completion time of the project.

Soon after the grand opening, the primes filed suit against the owner, who filed third-party actions against the designers. After one year of discovery and depositions, the owner met with the primes and settled their differences. A condition of settlement was the assignment to the primes of the owner’s rights against the designers. The owner, who at one time had defended the design team, provided testimony against them.

The case settled with the architect and its consultants paying the limits of their insurance coverage. The settlement included forgiving much of the additional services costs the designers incurred during the additional year of construction. In this case the contractors continued to work although the architect stopped certifying payments. The balance to complete and retainage were used by the owner as a bargaining chip for settlement.

Any errors or omissions by the designers could not possibly account for the millions spent in settlement. In this case, the primary controlling factor that caused the problem, the contractor’s inability or unwillingness to sequence and coordinate the work, was completely outside the control of the architect.

Options and Actions

Capt. Nately: It’s better to die on your feet, than to live on your knees.
Old Man: You have it backwards: it is better to live on your feet, than to die on your knees.
—Catch 22, the movie.

In the first example, the contractor stopped working when payments stopped. In the second example, the contractor continued to work with no payment. In either case, the architect could not continue to certify payments without eventually certifying all the money in the contract to be paid before the project was completed. But, as you can see, refusing to certify payments also did not have a satisfactory conclusion for the architect in either scenario.

The difference is that in these two cases the architect attempted to protect the owner’s interests by not certifying. The architect’s actions also kept them within the requirements of their contract. Since the outcomes were destined to be the same, the architect’s actions would be considered the wiser choice.

So what are the alternatives for these fatalistic scenarios? Is there any way to avoid disaster? The only reasonably available options are preemptive, since little can be done to change the outcome after the money begins to run out.

Unless there is a meaningful meeting of the minds on what it will take to complete the project, and sufficient money is infused into the budget, the prospects are slim. And if the contractor is incapable of completing the work, money will not be the cure. Unless the contractor is willing to continue without payment, only termination and replacement appear to be the reasonable choices.

Preventative actions
Preventive actions up front will not guarantee avoidance of this dilemma, but they will certainly increase the chances of success. Actions that could be taken include:

• Effective contractor prequalification and selection. AIA Document A305, Contractor’s Qualification Statement, is designed to obtain information to assist in determining if the contractor is capable of performing the work. Although it may not answer every question, if properly filled out it can be helpful in determining the contractor’s experience and financial stability.
• A reasonable project construction budget, Project cost management is difficult these days, and the use of a cost consultant or early contractor involvement on the project can help establish a reasonable budget. Contingencies are vital in guarding against budget shortfalls, and they should be used for both design and construction.
• Avoid accepting an unreasonably low bid. Projects can be underbid by accident or on purpose. Estimating inefficiency or a simple bust in the numbers can put the contractor in financial trouble quickly. Tough competition or the desire to construct a project at any cost can cause bidding below cost and put the contractor knowingly in trouble. The owner should have a realistic idea of what the costs should be and avoid awarding the work below its reasonable value.
• Enforcement of contractor coordination responsibilities. This one can be difficult to manage, but early emphasis and enforcement on the project can go a long way. The project schedule, submittal schedule, coordination drawings, and clarification sketches are a vital part of the Contractor’s Work Plan, and specifying and requiring them on a project will at least give early indications of the contractor’s capabilities. You may want to consider making a portion of the contractor’s payment contingent on receipt of an acceptable submittal schedule.
• Awareness of the time factor. Everyone on the project must be aware and act with the time clock in mind. Owner decisions, architect submittal reviews, RFI answers, and payment certifications, contractor submittals, schedules, and coordination are all time driven and important to the overall completion objective. Good meeting management, meeting reports, action item enforcement, and unwavering professionalism are tools that can aid in facilitating efficiency.

The bottom line is that the fewer surprises in a project, the more likely a favorable outcome. Old friends doing another project together, the gray-haired superintendent, the seasoned architect, and the informed owner are elements that can lessen the chances of catastrophic delays and budget depletion.

Conclusion

Lt. Col. Korn, XO: [speaking to Yossarian] All you have to do is be our pal.
Colonel Cathcart: Say nice things about us.
Lt. Col. Korn, XO: Tell the folks at home what a good job we're doing. Take our offer, Yossarian.
Colonel Cathcart: Either that or a court-martial for desertion.
—Catch 22, the movie.

An extended delay on a project schedule can be difficult to manage and often results in damages and claims. If you are faced with the dilemma of insufficient funds to complete the project, you must make the decision to withhold certification or risk breaching the requirements of your contract with the owner. Either way, the outcome is likely to be less than desirable.

A good option to managing your risk in such situations is to do your best to avoid them altogether. If you approach each project with sound contractor prequalification and selection, if the budget is adequate, if the project is reasonably bid, if the contractor’s work plan is sound and in use, and if the entire team works together with the mindset of efficiency and timely actions, there is an improved chance of success.

Although you may not control these outcomes on your projects, you should work with these goals in mind to hopefully avoid having to make that decision to certify or not to certify. Because, when the money runs out, and you are forced to decide, you may likely find yourself in Yossarian’s shoes, faced with a self-defeating course of action that can yield no positive result. You may find that either way you go, it is a Catch 22.

So as you review those bid tabs and fill out your bid scorecard to determine if the alternates, allowances, and contingencies are all accounted for, think about the importance of the construction procurement process and the importance of identifying and selecting a qualified and experienced contractor for the job, and of course, it goes without saying, be careful out there.