An Administrator's Guide to California Private School Law

Chapter 17 – Construction

5. C ONSIDERATIONS P RIOR T O W ITHHOLDING Schools should consult with legal counsel to determine if they should withhold payments due a contractor, and the appropriate amounts to withhold, to attempt to avoid or minimize the consequences of failing to timely pay a contractor. After a decision is made to withhold payments from the contractor, schools should frequently reexamine the situation to ensure the withholding continues to be proper. Schools should consider certain factors in their analysis regarding whether to withhold payments from a contractor, including the following:

 What legal basis allows the school to withhold payments from the contractor? The school’s right to withhold payments from a contractor is governed by the contract documents, statutes, regulations, and court cases. A school may be able to withhold payments to the contractor based on the provisions in the contract documents, such as damages to school or third party property, or withholding 100 percent of back charges. If there are no legal bases that require or permit the school to withhold payments from the contractor, the school may not do so.  What is the status of the project? The school’s decision whether to withhold payments from a contractor may depend on the status of the project. If a project is substantially complete, but was not completed on time, the school may decide to waive liquidated damages and the cost of the incomplete punch list items. On the other hand, if the project is nowhere near completion, but the project completion date has long passed, the school may wish to withhold payments for liquidated damages in order to encourage the contractor to complete the project and to ensure that the school will be able to recover from the contractor for the delays on the project.  What are the school’s goals? If the school’s goal is to have the contractor complete the project, the school may decide not to withhold payments. Withholding payments may hinder the contractor’s ability to pay for materials and subcontractors, and further delay completion of the project. On the other hand, if the situation has become irreconcilable and the school’s goal is to terminate the contractor, the school may wish to withhold for liquidated damages. If grounds exist, a school may also withhold for back charges, incomplete punch list items, damages to school or third party property, and other damages or losses as authorized by statutes or the contract documents.  What amount should be withheld? This may require the school to obtain estimates from the architect or another contractor in the case of back charges, damages to property, or incomplete punch list items. If the school’s liquidated damages are substantial, the school should consider retaining consultants to perform a critical path method and delay analysis to determine the appropriate amount of liquidated damages to withhold. The purpose of the consultants’ analysis is to establish that the school properly withheld payments from the contractor, and that the school should not require to pay the two percent per month penalty.

An Administrator’s Guide to California Private School Law ©2019 Liebert Cassidy Whitmore 577