There is a constant push and pull between contractors and property owners- contractors need to get paid quickly, to pay their staff, pay off credit for items purchased for the job, and to get ready for the next job- but property owners want to hold on to their money as long as possible- they have bills coming in and need to keep their own doors open. To balance this challenge, and ensure contractors get paid in a timely manner, many states have enacted prompt payment acts. These laws require that payments are made down the chain of contractors, from the general contractor to subcontractor to materials supplier, within a set time frame. These time frames are short, generally 7-14 days, and they start as soon as payment is received from the level above. So, for example, as soon as the general contractor is paid, he has 1-2 weeks to pay his subcontractors, who then have 1-2 weeks to pay their suppliers. This results in everyone getting paid in a reasonable and timely fashion.
So, is your job and payment protected? The short answer is no. Not every job is protected, because state law protections vary. But many are.
What is a Prompt Pay Law?
It is exactly what it sounds like- a statute which requires contractors and subcontractors, who receive payment for work on a construction project, to make payment to their subcontractors and vendors within a specified time and imposing penalties for failure to do so.
If you’re a worker and are waiting to receive a payment, it’s important for you to keep track of when payments are due. This can help you make cash flow projections for your construction business. It also means you know when to start debt collection. The prompt payment acts contain very specific and stiff rules that will apply when payment is not made in a timely fashion. For example, if payment is even a day late, some states rules allow you to add on a percentage increase, such as 15% of the total bill, as a late fee. This can be a significant amount of money.
What Are Prompt Pay Laws in My State?
Not all states have these laws, and states vary widely in their rules. Each law depends on the type of project and what type of performer you are.
Here is an example of two state’s rules, compared:
| California
2% interest/month on all late payments |
Louisiana
1.5% interest/day up to a maximum of 15% of the total payment due on all late payments |
| Owner Payment to General Contractor
Property Owners must pay general contractors within 30 days of receiving an invoice. |
Owner Payment to General Contractor
No protection.
|
| General Contractor to Subcontractor
Prime contractors must pay subcontractors within 7 days of receiving payment from above (unless otherwise agreed). Final payment must be made within 45 days of completion of the project. |
General Contractor to Subcontractor
Prime contractors must pay the subcontractor within 14 days after the prime contractor receives payment. Does not apply on residential projects.
|
| Subcontractor to Sub-subcontractor, etc.
Subcontractors must pay those working below them within 7 days of the subcontractor receiving payment.
|
Subcontractor to Sub-subcontractor, etc.
Subcontractors must pay workers that contract them within 14 days after the subcontractor receives payment. Does not apply on residential projects.
|
Because these laws and how they’re applied vary by state, and sometimes by project type, you want to be sure you’re familiar with the version of the prompt payment act that applies to the project and area you’re working. If you find the regulations confusing, be sure to reach out to someone who can help.
The attorneys at National Lien & Bond have experience in all 50 states and can help you make sure you’re getting paid in a prompt and proper fashion and that you know how quickly you need to pay your own suppliers and subcontractors.
This blog is for educational purposes only and not intended for legal advice.