Accepting a Reduced Final Payment – The Project Close-out Change Order

Kyle W. Ohlenschlaeger and Bruce E. Loren
Oct 13, 2022

Waiting to get your retainage payout is an unfortunate reality for many subcontractors. Whether it is because there is work from others that needs to be completed, there is a dispute not involving your work between the owner and general contractor, or any number of other reasons, you continue to request payment and the only response is – “we are waiting to get payment from the owner, you will get paid as soon as we do.”

As this drags on, in many cases the general contractor will turn to its subcontractors to negotiate a discount on the final bill for immediate payment. From the general contractor’s perspective, it either: (a) knows it needs to pay the subcontractor before it receives payment from the owner – maybe because the subcontractor has a claim against its bond or there is no enforceable pay-if-paid clause in the contract; or (b) attempting to negotiate a reduced close-out with the owner and is trying to pass down some of that reduction to its subcontractors. From the subcontractor’s perspective, agreeing to a 5 – 10% reduction for immediate payment can often be a lifeline for cash infusion.

Subcontractors typically fail to get any real benefit from agreeing to the reduced payout to close out a pocket. We often see subcontractors agree to the reduction, sign a lien or bond release for the reduced amount and receive payment – end of story. We see a better way, a way in which the subcontractor can actually receive a benefit (other than immediate payment, which is often required anyway) in exchange for its reduced payout.

When approached by a general contractor for a reduction, aside from negotiating the amount, we recommend that subcontractors make their acceptance contingent upon a release from the general contractor. General contractors will rarely, if ever, give a full release. However, in many cases you will be able to obtain a limited release excluding warranty obligations and latent defects. To the extent you are able to negotiate a release it should be incorporated into a close out change order, showing the reduction in the contract balance and including the release language, we recommend the following:

This change order is intended to close out the existing contract between general contractor and subcontractor on the project (the “Project”). In consideration for the reduction in the Contract Price as reflected herein, except as specifically set forth herein general contractor releases subcontractor from all claims relating to the Project, including but not limited to delay damages, liquidated damages, and for all claims relating to known or open and obvious defects or deficiencies in subcontractor’s work performed on the Project, none of which general contractor is presently aware. This release expressly excludes claims that arise after the date of this change order pursuant to subcontractor’s warranty obligations and/or all claims for latent defects in subcontractor’s work on the Project.

By including such a release in a change order, you are ensuring that the general contractor will not turn around after the subcontractor agrees to a reduced change order and immediately assert additional claims for delay or deficiencies in the work, thereby seeking a return of all or part of the payment they have just made. In addition, to the extent allegations of deficiencies arise later, the subcontractor’s attorneys and insurance carriers will be provided with an added defense to the claims to the extent they are shown to be open and obvious, rather than latent. In effect, the subcontractor is ultimately able to buy another benefit, aside from immediate payment, for agreeing to the reduced final payment.

Bruce E. Loren and Kyle W. Ohlenschlaeger of the Loren & Kean Law Firm are based in Palm Beach Gardens and Fort Lauderdale. Loren & Kean Law is a boutique law firm concentrating in construction law, employment law, and complex commercial litigation. Mr. Loren and Mr. Ohlenschlaeger have achieved the title of “Board Certified in Construction Law” by the Florida Bar, exemplifying the Bar’s recognition of this expertise. The firm’s construction clients include owners/developers, general contractors, specialty contractors in every trade, suppliers and professional architects and engineers. Mr. Loren and Mr. Ohlenschlaeger can be reached at bloren@lorenkeanlaw.com or kohlenschlaeger@lorenkeanlaw.com or 561-615-5701.