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AcqKMat

Withholding payment on a Construction Contract (amount greater than retainage)

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Here's my dilemma.

My COR has been approving invoices without withholding because he claims the Contractor was doing successful in his progress.  We are now at the end of the contract and he has identified several deficiencies that he believes the contractor owes us money.  He wants to withhold further payments from the contractor greater than the 10% retainage.  So in short, we have ~$300K left on the contract and he doesn't want to pay them because he overpaid them in other past payments. 

While I know FAR Part 33 outlines how the Government can issue a claim, is there anywhere that I can not pay them this amount?  I mean, FAR 32.103 outlines progress payments for construction contracts but I think logically, it would make sense to withhold payment.  However, the issue I have is that there was different subs whose payments are being withheld simply because we didn't properly withhold it from the subs who's work was not sufficient. 

Any thoughts?

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Also, just wanted to add that my justification for withholding the remainder of the money is as follows:

"When the work is substantially complete, the Contracting Officer may retain from previously withheld funds and future progress payments that amount the Contracting Officer considers adequate for protection of the Government and shall release to the Contractor all the remaining withheld funds. " FAR 52.232-5

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40 minutes ago, AcqKMat said:

We are now at the end of the contract and he has identified several deficiencies that he believes the contractor owes us money.

I'm confused.

Why would the contractor owe the government money for deficiencies in workmanship? Are you proposing to withhold payments as an offset against a future government claim against the contractor?

Why type of contract is this?

H2H

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1 hour ago, AcqKMat said:

Here's my dilemma.

My COR has been approving invoices without withholding because he claims the Contractor was doing successful in his progress.  We are now at the end of the contract and he has identified several deficiencies that he believes the contractor owes us money.  He wants to withhold further payments from the contractor greater than the 10% retainage.  So in short, we have ~$300K left on the contract and he doesn't want to pay them because he overpaid them in other past payments. 

While I know FAR Part 33 outlines how the Government can issue a claim, is there anywhere that I can not pay them this amount?  I mean, FAR 32.103 outlines progress payments for construction contracts but I think logically, it would make sense to withhold payment.  However, the issue I have is that there was different subs whose payments are being withheld simply because we didn't properly withhold it from the subs who's work was not sufficient. 

Any thoughts?

Are you clarifying that

1) the FFP construction contract (using FAR 52.232-5) is substantially complete? 

2) Has the Government accepted the work as substantially complete for turnover to the government, including the deficient work? 

3) If so, did you identify the deficiencies during the turnover and acceptance process?

Please clarify where you are..

By the way, if you withhold progress payments due to deficiencies, you are not directly withholding payment to the subcontractors listed in the instant request for progress payments. Depending upon how it is done and where you are in the acceptance process, you are withholding and/or retaining payments from the prime contractor.

But I'd like to know the status of the overall work, since you said that you "are now at the end of the contract". 

Edited by joel hoffman
Clarified my questions

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Not sure what your "dilemma" is.  But if it concerns "a maximum of ten percent retainage", you are not limited to withholding no more than 10 of a progress payment request.  Progress payments are made based upon the progress of the work that meets the contract requirements. If you find that work doesn't meet the requirements prior to final acceptance, you can adjust the calculated percentage of completion.

The mechanics will probably varying, depending upon several factors, such as where you are in the acceptance and turnover stage, how serious the deficiencies are, whether they were discovered prior to or after acceptance of the work and turnover, and if they would have prevented the project from being declared substantially complete if known before acceptance and turnover.

See also paragraph ( d ) of the Payments clause

Quote

 

(d) Refund of unearned amounts. If the Contractor, after making a certified request for progress payments, discovers that a portion or all of such request constitutes a payment for performance by the Contractor that fails to conform to the specifications, terms, and conditions of this contract (hereinafter referred to as the “unearned amount”), the Contractor shall --

(1) Notify the Contracting Officer of such performance deficiency; and

(2) Be obligated to pay the Government an amount (computed by the Contracting Officer in the manner provided in paragraph (j) of this clause) equal to interest on the unearned amount from the 8th day after the date of receipt of the unearned amount until --

(i) The date the Contractor notifies the Contracting Officer that the performance deficiency has been corrected; or

(ii) The date the Contractor reduces the amount of any subsequent certified request for progress payments by an amount equal to the unearned amount.

 

  • You can require the contractor to adjust the amount of the pay request by an amount equal to the unearned amount...

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1 hour ago, here_2_help said:

I'm confused.

Why would the contractor owe the government money for deficiencies in workmanship? Are you proposing to withhold payments as an offset against a future government claim against the contractor?

Why type of contract is this?

H2H

We had modifications that the contractor billed for and the Government paid.  Now, my COR is claiming its deficient.  Basically, he failed to do his job at the appropriate time so that we wouldn't have paid him.  Yes, we are proposing to withhold payment was an offset to a future government claim against the contractor.

Contract time is a FFP, Design-Build.

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1 hour ago, joel hoffman said:

Are you clarifying that

1) the FFP construction contract (using FAR 52.232-5) is substantially complete?  Yes, the contract is substantially complete.

2) Has the Government accepted the work as substantially complete for turnover to the government, including the deficient work? We did not accept the deficient work.

3) If so, did you identify the deficiencies during the turnover and acceptance process? We did identify the deficiencies as a part of our punch list items, these deficiencies were minor so they did not disrupt our ability to accept the building as "substantially completed."

Please clarify where you are..

By the way, if you withhold progress payments due to deficiencies, you are not directly withholding payment to the subcontractors listed in the instant request for progress payments. Depending upon how it is done and where you are in the acceptance process, you are withholding and/or retaining payments from the prime contractor.

But I'd like to know the status of the overall work, since you said that you "are now at the end of the contract". 

Here's what I mean regarding hurting the subcontractor.  

Let's say we did a modification for painting (Mod A)  and a modification for Fire life safety concerns (Mod B).  The prime invoiced for Mod B before he invoiced for Mod A.  We paid for Mod B and then when the invoice came for Mod A, we want to hold that money because Mod B wasn't found done correctly.  From this example, the subcontractors would be different because one would be a painter while the other would be a Fire protection engineer (FPE).  So now, the painter is hurt because we won't pay them for the FPE's mistake.  I hope that clears up my concern.  

By the end of the contract, we are basically finished with everything except these issues.  Once these are resolved, I will close the contract...and possibly pursue claims.

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Tell the contractor to reduce the amount of the progress payment request by the amount of the deficient Work (Mod B).  Adjust the percentage/amount of the appropriate CLIN or work activity by that amount..

He can request payment for the progress in the pay request for other acceptable work, including Mod A. If that is more than the offset overpayment, you just pay the difference and show the progress for that work.. 

If it is less than you already paid the contractor on the previous estimate, He owes the government for the difference plus interest on all of the overpayment, per paragraph d of the 52.232-5 clause.

Whether or not the subcontractor A gets paid is the contractor's responsibility under its subcontract with A.  

I didnt explain all the specific mechanics because one would have to see the details and the math.  But I hope you get the overall picture.  Quit thinking that YOU are not paying the painter. Don't pay the contractor for both Mods and then claim for the overpayment on this pay estimate.

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