Builders and Contractors Exchange
Weekly Bulletin: 14 Feb 2005
Prompt Payment Requirements
By: Pat Genzler
A question that often arises during the negotiations of a contract or subcontract is "when will we get paid?" Prompt payment is an important issue to maintain needed cash flow for operations, so a working knowledge of your rights and responsibilities is essential.
First, we need to distinguish the rules on private construction projects from "public" projects - where the owner is an agency of federal, state or local government. On purely private projects, there are few statutory rules governing prompt payment. Basically, whatever your contract provides is what you will get. For example, on private projects in Virginia, "pay when paid" clauses can be enforceable and can leave a subcontractor subject to delays in the owner's payments to the general contractor before the subcontractor will be paid. There is also no legal limit on the percentage of payments that can be held as retainage. Therefore, you need to understand and carefully negotiate in your contracts on private projects such terms as retainage, dates for invoicing and progress payments, late charges or interest on unpaid invoices, etc., in order to protect yourself.
On public projects, however, contractors and subcontractors have substantially more protections. The Virginia Prompt Payment Act, found at VA Code §2.2-4347 through 4355 provides for contractors:
- Payments to vendors and contractors shall be from state agencies 30 days after receipt of the vendor's invoice, and from local governments 45 days after receipt of invoice. There are exceptions for disputed invoices
- The government agency must provide notice of alleged defects in goods or services must within 15 days (20 days for local governments) of receipt of the invoice.
- Late Charges: Local governments must pay "late charges" up to 1% per month to the vendor. Interest on late payments by state agencies shall be paid starting 7 days after the payment date at the prime rate for US banks.
Subcontractors also receive special protections under the Prompt Payment Act:
- All prime or general contractors must pay subcontractors or suppliers their "proportionate share" of each payment received from the government agency within 7 days, OR the general/prime contractor must notify the agency and subcontractor in writing of its intent to withhold all or part of the payment, together with a reason for nonpayment.
- General/prime contractors must pay subcontractors interest on late payments at the rate specified in the subcontractor or 1% per month if no rate is specified.
These payment requirements must be "flowed down" to lower tier subcontractors. Remember too that retainage on public project contracts and subcontracts is limited to a maximum of 5% by state law (VA Code §2.2-4333).
In a future article, we'll discuss prompt payment provisions that apply on federal projects.
Questions?
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This article is meant to bring awareness to this topic and is not intended to be used as legal advice.