L E G A L LY S P E A K I N G Prompt Payment Laws: Know Your Rights by Greg Reaume, McInerney & Dillon
You might find this article helpful if you have been in this situation: your company is three months into a project, but last month’s payment has not come through on time. When you ask the general about it, he says that you did not submit the right paperwork - even though you submitted the same type of paperwork that you previously had without any issues. You try to find more backup and resubmit your pay application but get the same response. In the meantime, your material suppliers have started to get angry and are threatening everything from stopping your credit line to putting a lien on the project. Almost a year later you find out that the general was just stalling and was not paying you because it had spent the money on another project it had blown the budget on. Sounds stressful! And it is. Luckily, there are laws in most states penalizing general contractors for not paying you on time. These laws are generally 10
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called “prompt payment” laws. Some of them, like those in California, have a good amount of teeth. Their downside is that you usually have to start a lawsuit to kick them into gear. However, oftentimes just knowing enough to threaten using prompt payment laws can be just as good as starting a lawsuit. A quick note - most of my practice is in California, so I will focus on the law there. The laws in other states are generally similar.
What Is a Prompt Payment Law? A prompt payment law is a law that penalizes an owner for not paying a general contractor on time, or penalizes a general contractor not paying a subcontractor on time. These laws are found in the state’s legal code, usually called statutes. In California, prompt payment laws are found in California Business T H E
and Professions Code (the “B&PC”) § 7108.5. Under that law, a general contractor has to pay a subcontractor fairly soon after receiving the corresponding payment from the project owner. The only reason that a general contractor can withhold funds is if there is a “good faith dispute.” A good faith dispute is exactly what it sounds like. If your pay application asks for $50,000 in delivered materials but no one can find them on the project, then a general would be justified in withholding that money until the materials are found. However, anytime a general contractor withholds payment it can only withhold up to 150% of the disputed amount. Similar laws apply to retention payments. Civil Code § 8814(a) is where you will find that law in case you are looking for some exciting Friday night reading. These laws vary a bit between public
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