Tulsa commercial contractors must overcome the general public’s mistrust of contractors. Commercial contracting is different that residential in many ways, and I think most of people’s bad experience happen in residential settings, but not all.
In an effort to ensure that the owner or client is satisfied with the work that has transpired as well as keeping the Tulsa commercial contractor from financing the project, the General contractor and subsequently subcontractors will invoice and be paid for work done or progress payments. Progress payments are described by the American Institute for Contractors or AIC below:
“…Contractors and construction managers are reimbursed for their services as the work is competed on a pre-agreed-upon payment schedule. For commercial construction, it is most common for the contractors to be paid monthly, and in residential construction a biweekly payment schedule is common. At the beginning of the project a schedule of values (SOV) is developed by the contractor and then approved by the owner and/or designer. The SOV includes the major components of the building and an assigned value for each item. The contractor often uses the WBS to develop the schedule of values.
At the end of each pay period, the contractor submits a request for payment based on the SOV and the estimated amount of work completed. Typically, the architect and owner are required to review and approve the application for payment prior to the payment being released. If they agree with the quantity of work being billed for, they approve the pay application, and it is forwarded to the owner’s accounting department.
However, oftentimes, there are disputes on the amount of work claimed to be completed. It is often a good practice to review a pencil copy of the application in person and agree on the work completed before the application is formally submitted. It is also a good practice to have the SOV broken down in sufficient detail so that all parties can feel comfortable that they are authorizing payment only for work that has been completed. An example of a potential conflict is when contractors request payment for shop drawings, mobilization costs, or off-site stored materials. Designers and owners may be reluctant to pay for these items because they are out of sight. However, if discussed early, arrangements can be made so that the owner is comfortable paying for these items if certain conditions are met, such as documentation, bills of sale, or insured storage. The efforts taken to fully discuss and appropriately break down the SOV will be rewarded throughout the project…”
As the project continues the leverage the owner or client have over the Tulsa commercial contractor gets lower as the amount paid nears the contract amount. To alleviate this concern, the owner and prime contractor hold retainage. The AIC describes retainage as follows:
“… A common practice is to withhold a percentage of the progress payment from the contractor as incentive for the contractor to complete the project. The percentage withheld from the billings is called retainage. The retainage is typically released once the contract is substantially complete. Retainage offers two benefits to the owner. First, holding retainage incentivizes the contractor to finish the project and complete all of the final activities that may not have a high dollar value but are essential to allow the owner to use the building. Second, retainage also creates a pool of money that the owner can use in the event the contractor fails to meet his or her contractual obligations and another contractor is used to complete the work. Typically, 10% retainage is withheld; however, the percentage is often reduced as the project is completed. For example, once the project is 50% complete, the owner may reduce the retainage to 5% to correspond to the reduced risk…”
There are certain ethical pitfalls the Tulsa commercial contractor must avoid to keep from earning the people’s mistrust. One of the pitfalls at the beginning of the project are describe by the AIC like this:
“…Most of the costs contractors incur such as salaries, equipment, and materials must be paid before they receive payment from the owner. As such, the contractors collectively are financing the project between billing cycles. In addition to this, retainage is withheld, which further decreases the contractor’s cash flow. A technique used to increase the cash flow of contractors is called front end loading. This practice overvalues items that occur earlier in the project on the schedule of values. This essentially overbills the owner in the initial stages of the project to help improve the contractor’s cash flow. This practice, while common, raises serious ethical issues and should be avoided…”
As part of the progress payment, contracts between the Tulsa commercial contractors and subcontractors contain clauses that keep the general contractor from financing the subcontractor’s payroll. The AIC describes these pass-through clauses below:
“…Most construction projects will have a prime general contractor with subcontractors under them. Most subcontracts between general contractors and subcontractors will include pass through clauses, which essentially pass the obligations and restrictions of the general on to the subcontractor. This is commonly used with pay applications when an owner may cut the general contractor’s pay application, which then allows the general to cut the subcontractor’s payment. These types of clauses also link when the general gets paid from the owner to when the general is required to pay the subs. This specific clause is often referred to as a pay when paid clause…”
If the owner can be damaged by the Tulsa Commercial Contractor project being delayed, then they can stipulate to liquidated damages in the contract. Liquidated Damages are described by the AIC as follows:
“…All standard construction projects have a time frame for completion. The contracts will provide a number of days or a specific date to complete. In either case, the contract dictates a specific point in time where the owner can take ownership of the building and use it for its intended purpose. If the contractor does not deliver the building to the owner by the agreed upon date, the owner may have a loss of expected revenue, costs that they couldn’t capitalize on, or be damaged in other ways. At the end of the project, the owner could sue the contractor for damages, but to avoid this expensive process liquidate damage clauses are often included in the contract. Liquidated damages clauses set a fixed amount of damages the contractor must reimburse the owner for each day they are late. Liquidated damage amounts should not be arbitrary but based on the actual damages expected to be incurred…”
The clauses and common practices are all in place to ensure that all parties involved are able to work together to complete the project, make sure the owner or client is satisfied, and the architect, prime contractor, and subcontractors all get paid for the work they’ve completed. This ultimately helps the public see Tulsa Commercial Contractor in a much better light.