Payment issues can arise on many jobs. Everything goes smoothly at first, the work is done correctly and then suddenly, payment is delayed. A problem promised to be worked out quickly turns into weeks or months of delays, in some cases through no fault of the company trying to be paid. Disputes with other contractors, managers, project owners or lenders can cause delays, and while the parties try to work things out, the uninvolved and unpaid parties are left twisting in the wind.
Occasionally, the contract between the parties will have provisions that help address these circumstances, but in many cases they do not. This is where it can be helpful to invoke prompt payment statutes to attempt to obtain payment on faster terms. There are prompt payment statues that apply to federal projects. Further, 49 states (all except New Hampshire) have a prompt payment statute that applies to public projects. Thirty-four states have prompt payment statutes for private projects. Odds are, wherever a project is located and whatever type of project it is, there is a prompt payment statute that can help accelerate payment for completed work.
Federal Prompt Payment Statute
The U.S. Federal Prompt Payment Act applies to any contractor, subcontractor or material supplier providing labor, services or materials to any federally funded construction project. Under the FPPA, the U.S. government must pay prime contractors within 14 days of receiving an invoice for a progress payment and within 30 days of receiving an invoice for a final payment, including retainage. Once the prime contractor receives that payment, it has just seven days to pay subcontractors and material suppliers. Each subsequent tier of subcontractor or supplier then has seven days to pay those below it.
If a contractor, subcontractor or supplier fails to comply with these deadlines, then they must pay a statutory interest rate. For 2020, this interest rate is 1.125%. This accrued interest is due automatically within 10 days of the late payment. If the late-paying party fails to do that, then they are subject to additional penalties, which are generally a percentage of the accruing interest. To collect this interest, the party entitled to it must make a written demand for it within 40 days.
While the interest rate is not much of a penalty, it is better than nothing, and on larger projects it will serve as a motivating factor for contractors to make faster payments.
State Public Prompt Payment Statutes
While state prompt payment statutes for public projects are similar to the FPPA in concept, the details vary widely from state to state, as do the deadlines and benefits of each. For example, in Colorado, prime contractors are to be paid by the end of each calendar month, with final payment to be due within 60 days of completion and acceptance.
Downstream subcontractors and suppliers are then to be paid within seven days of receipt of payment. Interest on late payments is the greater of a contractually set interest rate or 15%. Illinois, Florida and Texas, have payment deadlines nearly identical to the FPPA and allow interest of just 1% on late payments. California also has deadlines that mirror the FPPA, but allows interest of 10% for prime contractors, 2% per month for sub-tiers and attorneys’ fees to the prevailing party in a lawsuit to recover a late payment.
The critical takeaway is to recognize that in nearly every state there is a prompt payment statute that can be used to obtain payment faster, or at least interest if payments are not made promptly. Further, in some states, the penalties are meaningful enough to result in actually faster payments. Be sure to be aware of any demand requirements or pre-conditions to obtain or be eligible for interest.
Private Prompt Payment Statutes
Prompt payments statutes for private projects vary even more than those for public projects. For example, Florida has multiple variations of ways to demand prompt payment. Under Florida’s standard prompt payment statute, payments must be made within 14 days of a contractor meeting several requirements, otherwise interest will start to accrue at a rate set by state statute (currently about 6.8%). But under Florida’s undisputed payments statute, a contractor who receives money for a project, must pay downstream contractors any undisputed amounts within 30 days. Failure to do so entitles the party seeking payment to seek payment, attorneys’ fees, interest, and to exercise severe pre-judgment collection rights against the non-paying party.
In contrast, Texas’s prompt payment statute for private projects is nearly identical to its public projects statute, except the interest rate on past due projects is 1.5% per month. Illinois requires payments on private projects to be made within 15 days or they will accrue interest at 10% per year. New York requires payment within 30 days to prime contractors and 7 days to downstream contractors. Late payments accrue interest at 1% per month.
The critical issue to recall about prompt payment statutes for private projects is that they provide remedies that can likely be used to supplement any contractual, lien or bond remedies that already exist. While prompt payment statues may not always force a faster payment, they can provide some leverage and some level of compensation for slow and late payments.
