By Anthony M. Kroese, Esq.
Despite best-laid plans, a construction project can stall to a halt without a smooth payment process. Often construction contracts include carefully crafted payment provisions that balance the overarching interests of the project owner and parties performing the work: (1) project owners that make progress payments to parties performing work should reflect the value of work actually performed to date; and (2) parties performing work should be paid by project owners in a timely manner. To further prevent project delays, and the risk of a mechanic’s lien, construction contracts provide methodical language to ensure that lower tier subcontractors and suppliers promptly receive progress payments. This article serves as a primer for a powerful mechanism to ensure that parties performing work receive prompt payment: State Prompt Payment Laws.
PROMPT PAYMENT A NECESSITY
On most construction projects, progress payments are required to keep the anticipated timetable for project completion. Construction contracts often provide comprehensive provisions for paying the contractor, construction manager, or builder for performing work. These provisions detail some of the following:
- Payment schedule (progress payments and final payment)
- Specific contents for submission of satisfactory payment application
- Comprehensive timetable for the submission, review, and response to payment applications
- Mandatory language that must be included in all subcontractor and supplier contracts
- Obligations to timely pay lower tier subcontractors and suppliers
It is critical that contracts provide language ensuring timely payment to parties to keep the project on track for scheduled completion. The driving concern for builders: prompt payment for work performed to ensure continued cash flow during the project. Remember, most project owners only withhold payment for outstanding contract requirements (for example: punchlist items) or pursuant to contract provisions; project owners want projects to remain on schedule and free from mechanic’s liens.
Practice Tip: Ensure that the progress payment amount accurately reflects the work performed at the time the progress payment is requested to avoid a rejected request or insufficient funds to complete the outstanding work.
STATE PROMPT PAYMENT LAWS
Many states have enacted prompt payment statutes for both private and public projects. In fact, states may provide different prompt payment statutes with different requirements for contracts with the following types of entities: private contracts, public contracts, state and municipal contracts, contracts involving school boards, and infrastructure contracts. These statutes are precarious for the unaware, but often provide straightforward protections to ensure prompt payment. Generally, prompt payment laws typically govern the following non-exhaustive list:
- The project owner’s obligation to make payment of an approved amount within a certain period of time following a builder’s payment application
- Language that must be contained within all subcontractor and supplier contracts regarding prompt payment following the builder’s prompt payment from the project owner
- Whether the parties are free to contract for shorter or longer payment terms
- Consequences for failure to make prompt payments to any tier contractor or supplier
Practice Tip: Certain projects may be governed by prompt payment statutory and case law requirements in multiple jurisdictions—the jurisdiction where the project is located and the jurisdiction of any choice of law provision contained within the project contract. Be sure to check with local municipal government laws to determine whether local law provides for stricter requirements for prompt payment.
For both project owners and parties completing work, knowledge of controlling prompt payment law is both a sword and a shield for one main purpose: ensuring that payment is not withheld from parties entitled to it in furtherance of timely completion of construction projects.
CONCLUSION
Economies are driven by many factors, with one of the most important being the construction industry. For the industry to remain economically viable, both with public and private projects, contractors must receive prompt payment throughout the life of a project.
About the author
Anthony Kroese focuses his practice at Goldberg Segalla on commercial litigation, business services, sports and entertainment, and construction law matters. Anthony serves a wide variety of clients in commercial transactions, personal and commercial real estate, and the creative and cost-effective resolution of development and construction contract disputes. Anthony also focuses his practice on worksite safety and proactive strategies employers in all industries should take to mitigate risk.
Modern Contractor Solutions, June 2019
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