If you earn money in the Texas construction industry, you may be familiar with the Texas Prompt Payment Act. For private construction work, the Texas Prompt Payment Act requires:
[If you are working on a public project, check out Subcontractor Rights on Public Construction Projects]
- Owners pay their general contractors undisputed amounts owed within 35 days of receipt of a written request for payment
- General contractors pay their subcontractors (or suppliers) within 7 days after receiving payment from owner
- Those subcontractors pay their subcontractors (second tier subcontractors) within 7 days after receiving payment from general contractor.
If not, interest is added to the amount you’re owed at 1.5% per month (18% per year) until you are paid. For public construction work, the time periods for making payment change to 31 days for general contractors and 10 days for subcontractors. Calculation of interest also changes for public construction work to the Wall Street Journal’s prime rate plus 1% per month.
The Texas Prompt Payment Act is a great tool to ensure contractors, subcontractors, and suppliers receive timely payment for the work they perform or the goods they supply. But there is much more to the Act than just payment deadlines and late payment interest.
Here are 5 other aspects of the law you need to know to understand the full scope of tools the Act gives you to get paid, and their limits.
1 – Your right to receive timely payment cannot be waived
The Texas Prompt Pay Act was enacted to protect the payment rights of companies that are at a disadvantage when negotiating the terms of their work. Owners and general contractors at the top of the construction food chain have the money and award the work, so they can dictate the rights and responsibilities of their subcontractors and suppliers. To counteract this inequity, any agreement or contract terms which waive or contradict the rights and remedies created by the Act are void and unenforceable.
Your contract may clearly state in all caps and bold letters that you will not be paid for 90 days after you submit your invoice. Maybe you also initialed a statement in your contract saying, “I hereby waive all my rights under the Texas Prompt Pay Act.” You may even have accepted several payments on the job far after the Prompt Pay statutory deadlines without complaint. It doesn’t matter because your rights and remedies under the Act cannot be waived.
2 – If you sue to get paid, you can recover your attorney’s fees and costs
Although the Texas Prompt Payment Act adds interest to late payments, that added 1.5% for paying late often isn’t enough motivation to force payment. The real threat the Act imposes for late payment is recovery of the attorney’s fees and costs you incur when you sue to get paid. Debtors are much more motivated to pay your bills when they are faced with the prospect of not only paying the money they owe with interest, but also attorney’s fees and court costs which could quickly exceed the original bill. However, there are limits to this remedy.
First, recovery is limited to “reasonable” attorney’s fees, but even reasonable attorney’s fees add up quickly. Also, recovery of such fees and costs are not guaranteed. It is up to the court whether you recover such fees and costs and, if so, how much.
3 – You can stop working and recover costs arising from the work stoppage
Another incentive the Texas Prompt Payment Act provides to encourage timely payment is the right to stop work. Regardless of the terms of your contract, if you are not paid as required by the Act, you have the right to walk off the job. Owners and contractors are often under pressure to meet completion deadlines, so delays from work stoppage can be more persuasive than money.
There are some limitations to this right, however. First, you must provide notice of your intent to suspend work 10 day prior to stopping work. Also, the notice must be given in compliance with the act, which includes written notice to the owner and its lender if the owner obtained a loan to pay for the project. If payment is made or is otherwise satisfied in accordance with the Texas Prompt Payment Act within the 10 days, you cannot suspend your work. However, if you give proper notice and the debt is not satisfied within the 10-day notice period, you don’t have to restart your work until you are paid the underlying debt plus costs for your demobilization and remobilization or similar costs you incur arising from the suspension of work.
4 – When withholding payment is allowed under the Act
If payment is not made within the requirements of the Texas Prompt Payment Act because of a “good faith dispute”, then you won’t get to use the rights listed in 1 through 3 above. The Act states that a dispute over whether the work was properly performed is a good faith dispute but does not otherwise clarify the exception. Ultimately, if the parties cannot agree on whether a good faith dispute exists, the courts will decide if the good faith exception applies based on the circumstances of the non-payment.
To invoke the good faith dispute exception, the debtor must provide you with written notice of the dispute with specific reasons for non-payment. The debtor must also give you a reasonable opportunity to cure the dispute if a cure is possible. Also, the debtor can only withhold the portion of the payment that is equal in value to the work in dispute (residential construction can withhold value, plus 10%). If only half of the value of your outstanding invoice is disputed, you can still exercise your rights provided by the Act for the unpaid, undisputed portion of the invoice.
5 – Not all construction is treated the same
The Texas Prompt Payment Act does not apply the same to all construction projects, so it is important to consider certain details when applying the rules of the Act. As noted above, interest on late payments for public construction work is calculated differently from private construction work, as are the payment deadlines. Notice requirements are also calculated differently for construction jobs if the owner has funded the construction with a loan from a lender. The Act also has special provisions for residential construction work which affects the application of good faith withholdings, notice periods, and rights to suspend work.
To receive the full benefits of the Texas Prompt Payment Act, it is always best to consult a legal advisor to ensure your rights are fully protected. To so do, reach out to National Lien and Bond team and consult with one of our legal experts.
This article is for educational purposes only.