Legal and Regulatory

Using Prompt Payment Laws to Fill the Voids Created by Lien Waivers

Prompt payment laws ensure prompt and efficient payment on certain construction projects. Contractors and subcontractors should not be afraid to use these laws as a tool to get funds owed.
By Ashley B. Nichols
October 2, 2018
Topics
Legal and Regulatory

In the days of obligatory lien waivers, contractors and subcontractors have fewer and fewer tools to ensure payment for work rendered on a project. Despite the eroding functionality of mechanics’ lien laws, several forms of payment acts exist throughout the country that guarantee prompt payment to contractors and subcontractors for work that has been provided on a job. Indeed, these prompt payment laws, coupled with any underlying construction (sub)contract, are instrumental in ensuring efficient payment to contractors and subcontractors alike.

First and foremost, all parties to a construction contract should be aware which, if any, prompt payment act applies to their project. The federal Prompt Pay Act generally applies to service and material contracts with the federal government. Similarly, individual commonwealth and state statutes may contain prompt payment laws within their own procurement codes that outline payment obligations of certain agencies to contractors (and these contractors to their subcontractors).

Yet, prompt payment acts do not only protect federal and state contractors. Several commonwealth and state statutes contain prompt payment provisions that apply to private construction contracts, even when such statutes are not incorporated by reference in the underlying contract. Indeed, some state statues prohibit waiving prompt payment provisions enacted by their legislatures.

If a prompt payment act is in play on a particular project, all parties should be on notice of the payment terms mandated by the law. Of note, most payment acts will contain terms outlining:

  • Payment timeframe. The most obvious terms contained in a prompt payment laws pertain to the timeframe in which payment for work rendered or services provided must occur. These terms may also include a grace period for late payments.
  • Withholding payment. Complementing the provisions detailing payment timeframes, many acts also include sections outlining when payments may be properly withheld. Of note, prompt payment laws may require owners or contractors to detail, in writing, their reasoning for withholding payment within a certain number of calendar days from receipt of an invoice. Failure of a party to provide such written notice of alleged deficiencies may waive its right to withhold payment and, instead, necessitate full payment of the invoice.
  • Implications for failing to comply with payment terms. The teeth of many prompt payment laws break through in their penalties for failing to comply with their payment terms. Damages that could be awarded under such statutes include interest penalties (likely a percentage of the amount withheld), attorneys’ fees and expenses. However, some laws provide such penalties should only be applied if the decision to withhold payment is arbitrary or made in bad faith.
  • Suspension of performance. Significantly, some prompt payment laws permit contractors and subcontractors to suspend their work, without penalty, until payment is received. The circumstances under which suspension is warranted varies by statute and should be analyzed before any decision to stop work on a project is made.
  • Non-applicability. Prompt payment laws also address situations where the statute has no application. Some payment acts have provisions exempting their applicability to small residential and owner-performed projects. Similarly, laws pertaining to government contracting may omit certain agencies or municipalities from its mandates. Further, government contracting statutes may also contain limitations in those situations where a legislature fails to timely enact a budget.
  • Waiver of prompt payment laws. Lastly, some prompt payment laws contain express prohibitions against waiving any of their terms by contract or other agreement. These prohibitions illustrate the specific commonwealth or state legislature’s intention to protect contractors and subcontractors and make prompt payment a public priority and policy.

The need for and use of prompt payment laws have become more significant and instrumental to contractors and subcontractors as lien waivers are more and more likely to be required to obtain progress payments on a construction project. Since these laws are statutory in nature, their applicability and terms fluctuate between the states, and a detailed analysis of the law applicable to a project must be undertaken before any decision is made to act under the law; particularly, to stop work. Although several forms of prompt payment laws exist throughout the country, one fact remains true — the laws evidence an intent to ensure prompt and efficient payment on certain construction projects. Accordingly, contractors and subcontractors should not be afraid to use these laws as a tool to get the funds due and owing to them.

by Ashley B. Nichols
Ashley B. Nichols, Esq. focuses her practice on business and commercial litigation in the construction and labor industries as well as appellate and post-trial advocacy. In the construction arena, she litigates all types of construction claims, including claims for lost profits and delay damages, and warranty and workmanship claims. Ashley drafts and reviews contracts in an effort to mitigate lawsuits. She also provides counseling and claims avoidance advice. She participated in the American Bar Association’s Forum on Construction Law Trial Academy, a rigorous training program that focuses on trial skills and is instructed by accomplished construction litigation experts. Ashley also counsels business owners and employers on wage and hour issues concerning the Pennsylvania Minimum Wage Act, the Pennsylvania Wage Payment Collection Law, the Fair Labor Standards Act, and independent contractors. She advises employers on Occupational Safety and Health Administration (OSHA) audits, compliance and whistleblower complaints, and workers’ compensation claims. She regularly reviews employee policies and handbooks.

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