Eighty-fifth in a Series—Each issue of this newsletter discusses important terms found in typical construction documents. This month, Doug Shevelow, P.E. & Esq., examines what the EJCDC’s standard form C-700 requires for Final Payment.

When does a construction project begin and end? The beginning is easy to identify. It’s when the Owner and Contractor sign on the dotted line, making a binding contract. The end of a construction project is a little harder to figure out. Is it when substantial completion is achieved? Is it when the punchlist is complete? Or is it when the contractor submits its final application for payment?

This month’s column looks at Section 14.07 of the EJCDC C-700, which covers the topic of final payment. Typical of most form contract documents, the C-700 touches on the issues of substantial completion, punchlist and contractor’s final application for payment and provides, in 14.07, a good benchmark for determining the end of a project.

Under the C-700, the final payment process starts after several conditions precedent have occurred: substantial completion, punchlist generation, final inspection identifying all punchlist items as complete, and delivery of all key project documents, such as operations and maintenance manuals, manufacturers’ warranties, as-builts and insurance certificates.

14.07 Final Payment

A. Application for Payment

1. After Contractor has, in the opinion of Engineer, satisfactorily completed all corrections identified during the final inspection and has delivered, in accordance with the Contract Documents, all maintenance and operating instructions, schedules, guarantees, bonds, certificates or other evidence of insurance certificates of inspection, marked-up record documents (as provided in Paragraph 6.12), and other documents, Contractor may make application for final payment following the procedure for progress payments.

Next, the Contractor is required to submit evidence of two years’ worth of completed operations insurance, consent of its surety to final payment, and lien waivers to demonstrate to the Owner that the project is and will remain lienfree. The Contractor also has to lay its cards down on the table and identify any claims that it thinks remain unsettled.

2. The final Application for Payment shall be accompanied (except as previously delivered) by:

a. all documentation called for in the Contract Documents, including but not limited to the evidence of insurance required by Paragraph 5.04.B.7;

b. consent of the surety, if any, to final payment;

c. a list of all Claims against Owner that Contractor believes are unsettled; and

d. complete and legally effective releases or waivers (satisfactory to Owner) of all Lien rights arising out of or Liens filed in connection with the Work.

3. In lieu of the releases or waivers of Liens specified in Paragraph 14.07.A.2 and as approved by Owner, Contractor may furnish receipts or releases in full and an affidavit of Contractor that: (i) the releases and receipts include all labor, services, material, and equipment for which a Lien could be filed; and (ii) all payrolls, material and equipment bills, and other indebtedness connected with the Work for which Owner or Owner’s property might in any way be responsible have been paid or otherwise satisfied. If any Subcontractor or Supplier fails to furnish such a release or receipt in full, Contractor may furnish a bond or other collateral satisfactory to Owner to indemnify Owner against any Lien.

The EJCDC, like most form contract documents, then puts the Owner’s design professional in charge of reviewing and approving the Contractor’s final payment application, with the authority to reject the application and ask the Contractor to resubmit a corrected version.

B. Engineer’s Review of Application and Acceptance

1. If, on the basis of Engineer’s observation of the Work during construction and final inspection, and Engineer’s review of the final Application for Payment and accompanying documentation as required by the Contract Documents, Engineer is satisfied that the Work has been completed and Contractor’s other obligations under the Contract Documents have been fulfilled, Engineer will, within ten days after receipt of the final Application for Payment, indicate in writing Engineer’s recommendation of payment and present the Application for Payment to Owner for payment. At the same time Engineer will also give written notice to Owner and Contractor that the Work is acceptable subject to the provisions of Paragraph 14.09. Otherwise, Engineer will return the Application for Payment to Contractor, indicating in writing the reasons for refusing to recommend final payment, in which case Contractor shall make the necessary corrections and resubmit the Application for Payment.

Payment is due to the Contractor within 30 days of the Owner’s receipt of the application that the Engineer has approved. However, the EJCDC includes a powerful provision that allows the Owner to pay less than the full amount approved by the Engineer. The Owner is permitted to withhold payment for any setoff it may be claiming against the Contractor. Setoff can be due for any number of reasons, including liquidated damages, the Owner’s indemnification rights, or the Owner’s costs in completing or remedying defective or nonconforming work.

C. Payment Becomes Due

1. Thirty days after the presentation to Owner of the Application for Payment and accompanying documentation, the amount recommended by Engineer, less any sum Owner is entitled to set off against Engineer’s recommendation, including but not limited to liquidated damages, will become due and will be paid by Owner to Contractor. The next section of the EJCDC C-700, 14.08, requires the Owner to release accumulated retainage to the Contractor, even if the project is not finished, if the Contractor is not at fault for the late work.

Section 14.09 is a mutual waiver of claims made effective by final payment:

  • The Owner waives all claims except for those arising from surprise liens and defective work that appears later.
  • The Contractor waives all claims except for those previously identified and expressly acknowledged in writing by the Owner as still unsettled.

Contractors wishing to maintain claims must take care to compel the Owner to make such a recognition that there remain unsettled claims. This requirement is in addition to 14.07.A.2.d, which requires only that the Contractor identify unsettled claims. This requirement has the potential for abuse by an Owner not willing to make final payment with outstanding claims pending.

In addition, this provision seems to be in tension with Ohio Revised Code § 4113.62(B), which voids as a matter of public policy any provision in a construction contract that would make waiver of previously asserted and properly noticed claims a requirement for receiving final payment.

In cases where such claims remain unsettled, the true completion of the project could be years away—on the other side of difficult and expensive litigation. Nothing in the EJCDC’s C-700 can guarantee that all will run smoothly and there will be no outstanding claims, and thus no need for such litigation.