ANY CONTRACTOR who does commercial or complex residential work has had to either prepare or give input for a schedule of values. As used in many standard form contracts (such as the AIA series of documents), the primary purpose of preparing a schedule of values is to permit the owner or architect to determine what percentage of completion has been achieved for particular items of work in order to agree on progress payments. See AIA A101-1997, “Owner-Contractor Agreement,” ¶ 5.1.4: “The schedule of values shall allocate the entire contract sum among the various portions of the work.”
Knowing that the timing of payments will depend on how the schedule of values is prepared — and that 5% to 10% of the money they have earned will be held back from them as retainage for a long time — some contractors focus exclusively on how to reflect the greatest amount of their work as early as possible.
If front-loading progress payments is the only thought that is given to a schedule of values, the contractor preparing it can find himself in big trouble — both for what he does and for what he doesn’t do. Schedules of values can be critical in a number of different contexts, and how they are prepared can make or break the bottom line of a project. Here are four of those contexts.
Progress payments to subcontractors and suppliers. As noted above, the original purpose of asking a contractor to break down components of his total price into discrete segments is to assist the person evaluating a pay application to assess how far along the contractor is on each part of the work.
If, in an attempt to get more funds released early, a contractor overstates, for example, underground piping and understates finish flooring, it may face an embarrassing (and worse) incident if the underground piping is 100% subcontracted, and that sub is not getting the lion’s share of the payment. If the sub complains to the owner, how does the contractor explain that the schedule of values didn’t mean what it said? Many contract conditions set out clear restrictions on how much of a contractor’s overhead and profit can be added to any line item, and that may not be enough to talk one’s way out of the problem.
Similarly, in jurisdictions with prompt pay laws, such as the federal government, a contractor is not required to pay a sub if it has a legitimate dispute over the work — but in that case, it is required to notify the government and not collect the disputed funds (or if it has already collected them, to repay them to the government) until the dispute is resolved. If some of the funds attributed to that line item in the schedule of values really should go to the contractor, it will have a hard time explaining why it should be allowed to collect them and not pay the sub.
Claims and extras. As eternal optimists, contractors seldom are thinking of problems down the line when they are preparing their initial schedules of values. If a problem during performance gives rise to a claim, however, it could be crucial to be able to demonstrate the validity of a bid — and the component line items in it — to recover funds legitimately due. For example, if the line item for paint and wall coverings is understated (so that the underground utilities can be higher), it might be difficult to later prove that the contractor didn’t underbid the paint and wall coverings when attempting to collect for extra work.
Owner/designer exposure for overpayment. As long as the project goes well, everyone is happy. If there is a default by a contractor and a surety is brought in, or if the owner goes under and the bank is stuck with a bad loan, you can expect those folks to be scrutinizing the payment application process to see if there is a way to recoup some of the money.
One of the first things they look at is whether the people certifying the payment applications were negligent. Should they have been on notice that something was amiss on various line items? As a result of court cases on this point, architects, engineers and firms acting as owner’s reps are increasingly cautious about agreeing to schedules of values that look at all unbalanced.
False Claims Act. Many states, as well as the U.S. government, have False Claims Acts (both civil and criminal) that prohibit the making of a false statement in connection with a request for money on a public job. Although a medical clinic submitting phony invoices to Medicaid frequently springs to mind, in fact, the False Claims Act is often used against contractors who overbill. I have seen contractors’ faces when they receive a letter from the Inspector General of GSA, or a lawsuit from the Department of Justice, demanding treble damages, debarment and potential criminal investigation. It is not a pretty sight.
The lesson here is simple: Play it straight. There is no way to know when you start a project where it will end up. Tinkering with a schedule of values to recoup some dollars earlier than you’d otherwise get them could come back to haunt you in any one of a number of ways that you can’t foresee or control.
Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo., tel. 816/421-4800 or e-mail to firstname.lastname@example.org.