The Prompt Pay Act has improved the flow of funds to those who furnish and pay for the labor and materials in private construction. It contains important provisions affecting progress payments, change orders, “pay-if paid”, disputes, and suspension of work.
The law applies to prime contractors, subcontractors and suppliers entitled to file a mechanic’s lien on projects where the prime contract has an original price of $3,000,000 or more. It does not apply to residential projects of 4 or fewer units, or where the prime contract was entered into before November 8, 2010.
Here’s how the Prompt Pay Act works:
Payment Applications
Contracts and subcontracts must provide reasonable time periods within which periodic payment applications are submitted, approved or rejected, and paid. The parties may negotiate those time periods provided they’re reasonable and don’t exceed the prescribed limits.
The reasonable time period for submission of an application may not exceed 30 days. The cycle begins with the end of the first calendar month occurring at least 14 days after the applicant’s commencement of work. Payments are based on actual progress, although milestones may still be a basis for payment if the time between applications doesn’t exceed 30 days.
Once submitted, the reasonable time period for approval or rejection may not exceed 15 days. But since the prime contractor must receive, review, and assemble applications from its subcontractors for inclusion in its own submission, the law allows the prime contractor an additional 7 days to approve or reject a subcontractor’s application. Likewise, the law allows each tier below the prime contractor 7 days more than the tier above for approval or rejection of an application from the tier below. The grounds for rejection are not prescribed by the law and remain subject to the parties’ contract. However, any rejection, whether in whole or in part, must be in writing, explain the factual and contractual basis for the rejection, and be certified as made in good faith.
An application for payment that’s neither approved nor rejected within the specified time is deemed approved. To account for possible oversight or error, an application that was deemed approved may still be rejected up until the time payment is due, but the rejection must otherwise meet the statutory requirements for rejection. Meanwhile, a deemed approved application advances in line toward payment.
Finally, regardless of whether approval was express or deemed, the reasonable time period for payment of an application may not exceed 45 days after approval.
Change Orders
The law also requires contracts and subcontracts to provide reasonable time periods within which written requests for change orders are approved or rejected. The time period for approval or rejection of change orders may not exceed 30 days after submission of the request, or commencement of the changed work, whichever is later. The prime contractor, and each lower tier, is allowed 7 days longer than the tier above for approval or rejection of a change order request from the tier below. Requirements for submission and entitlement remain a matter of contract. Rejection may be in whole or in part, but it must be in writing, explain the factual and contractual basis for rejection, and be certified as made in good faith.
If a change order request is neither approved nor rejected within the specified time, it’s likewise deemed approved, unless properly rejected before payment is due. And once approved, whether expressly or deemed, the change order request may be submitted for payment with the next application for payment.
Disputes
Disputes over rejected payment applications or change order requests are inevitable, but many contracts require resolution of disputes to await completion of the project. Consistent with the improvement to the flow of funds, the Prompt Pay Act directs that rejection of a payment application or a change order request is subject to the applicable dispute resolution procedure, and any provision that requires a party to delay use of that procedure for more than 60 days is void and unenforceable.
Pay if Paid
Contract provisions that condition any obligation to pay upon receipt of payment from a third party (“pay if paid”) can shift the risk of non-payment to those with no connection to the reason for non-payment and least able to bear that risk. The Prompt Pay Act declares “pay if paid” provisions void and unenforceable, with two exceptions, which must be clearly stated in the contract. The party seeking to enforce pay-if-paid bears the burden of proof as to each element, and if neither exception applies, it must pay regardless of whether it receives its own payment.
The first exception applies where non-payment from the third party is due to failure in performance by the party seeking payment. The party seeking to enforce pay-if-paid must have provided written notice of the failure, and the party seeking payment must have failed to cure within the contractual cure period, or if there is none, within 14 days after receipt of written notice.
The second exception applies where the third party fails to pay because it is insolvent or becomes insolvent within 90 days after submission of the application for payment. But, the party seeking to enforce the payment condition must have taken specific measures to obtain security and minimize the risk of non-payment. Those measures are filing documents to obtain a mechanic’s lien before its first application for payment for on-site work, maintaining, perfecting and foreclosing on the lien, and pursuing all reasonable legal remedies to obtain payment until there’s a reasonable likelihood further action will not result in payment. The party seeking payment may question the legal remedies taken, and if not satisfied, may file a proceeding in court for a quick judicial determination.
Suspension of Work
Unpaid contractors and subcontractors may no longer be forced to continue work because of contract provisions prohibiting suspension for any reason, or requiring long notice and cure periods for non-payment. Now, any contract provision requiring a person to continue working if payment of an approved amount is not received within 30 days of when it’s due, is void and unenforceable.
There are two exceptions:
- The first exception is when non-payment is due to a dispute over the quality or quantity of work, typically where defects or errors in measurement appear after payment approval for apparently correct work or quantities.
- The second exception is when non-payment is due to a default occurring after approval of the payment, typically where the party seeking payment has defaulted in some other way, such as abandonment of the project, causing damages that fairly should be offset against the pending payment. For either exception to apply, the party seeking to prevent suspension must have given prior notice of the dispute or default, and paid all undisputed amounts due.
Unenforceable Provisions
Prompt Pay is the law. And to make sure of that, the Act also provides that any contract provision which purports to waive or limit the terms of the law is void and unenforceable.