The Federal government, District of Columbia, Virginia & Maryland have “Prompt Pay” laws that create payment obligations in public construction contracts. The Federal, District of Columbia & Maryland Prompt Pay laws also apply to the government owner of a public project. Virginia’s Prompt Pay law does not apply to the government owner.
The District of Columbia, Virginia, and Maryland also have Prompt Pay” laws that apply to owners, contractors, and subcontractors on private projects.
Federal Prompt Pay Statute
The Federal Prompt Pay Act applies to any construction project funded by any agency of the federal government or the District of Columbia.[1] The payment obligations apply to the government owner, all contractors and material suppliers and protects all tiers of contractors, subcontractors, and suppliers from late payments. The Act sets deadlines for payment of invoices and imposes interest penalties for failure to pay before those deadlines.[2]
The government agency must pay the general contractor on a construction project no later than 14 days after the receipt of a proper payment request and there is no disagreement over quantity, quality, or contractor compliance with contract requirements.[3] The owner must make final payment, including retainage, within 30 days after receipt of a proper payment request or the 30th day after government acceptance of the work or services are completed by the contractor.[4]
The general contractor must pay a subcontractor or supplier that has provided “satisfactory performance” within 7 days after receipt of payment from the owner.[5] Any subcontract must require each subcontractor to include the same payment and interest requirements into their contracts with any lower-tier subcontractors or suppliers.[6]
These Prompt Pay provisions do not impair the right of a contractor or a subcontractor at any tier to hold retainage as permitted in the subcontract.[7] A contractor or a subcontractor at any tier may also withhold payment pursuant to subcontract provisions without incurring late payment penalty if (i) a notice conforming to certain standards has been furnished to the subcontractor; and (ii) the contractor furnishes the Contracting Officer a copy of that notice.[8]
When applying for payment, a general contractor must certify that it has paid all subcontractors and suppliers the amounts previously paid for their work by the owner. Failure to pay subcontractors the full amounts invoiced for their scope of work can subject the general contractor to fraud claims by the government.[9]
Federal Department of Transportation regulation also requires a general contract clause to require prime contractors to pay subcontractors for satisfactory performance of their contracts no later than 30 days after receipt of payment from the owner in any Disadvantaged Business Enterprise program. Retainage must also be paid to subcontractors within 30 days after work is satisfactorily complete.[10]
District of Columbia Prompt Pay Statute
Federal Prompt Pay Act does apply to any construction project funded by any agency of the District of Columbia.[11] The District of Columbia also has Prompt Pay provisions that apply in private construction general contracts.[12] These Prompt Pay provisions apply to the owner, general contractors, and first and second tier subcontractors only.[13] The Prompt Payment Act applies to material suppliers only if they fabricate materials off-site, from plans and specifications unique to the project.[14]
If a construction general contract does not provide specific deadlines for payment, the owner must pay the general contractor undisputed amounts owed under the terms of the written contract within the earlier of (1) 15 days after the day on which the occupancy permit is granted; (2) 15 days after the day on which the owner or the owner’s agent takes possession; or (3) 15 days after an owner receives a contractor’s payment request.[15] If a contract provides for specific dates or times of payment, the owner shall pay to the contractor undisputed amounts owed within 7 days after the date or time specified in the contract.[16]
A contractor or subcontractor must pay undisputed amounts to subcontractors within 7 days after receipt of payment for the subcontractors’ work or materials.[17]
An owner or general contractor that fails to make payment within these deadlines, are liable for interest at 1.5% per month and reasonable attorney’s fees.[18]
Virginia Prompt Pay Statute
The Virginia Public Procurement Act has contained Prompt Pay provisions for some time. Any contract awarded by any state agency must include a payment clause that obligates the general contractor to do one of two things within seven (7) days after receipt of payment from the state agency:
a. Pay subcontractors for the proportionate share of the total payment received from the agency attributable to the work performed by the subcontractor under that contract; or
b. Notify the agency and subcontractor, in writing, of his intention to withhold all or a part of the subcontractor's payment, with the reason for nonpayment. [19]
Unlike the Federal, District of Columbia, and Maryland laws, the Virginia Prompt Pay law does not apply to the governmental owner.
Any contract awarded by any state agency must also include an interest clause that obligates the general contractor to pay subcontractors interest at the rate of one percent (1%) per month, unless the contract “otherwise provides.”[20] Interest accrues on all amounts that remain unpaid seven (7) days after receipt of payment from the state agency, except for amounts legitimately withheld. A general contractor must include in each subcontract a provision requiring each subcontractor to include the same payment and interest requirements in all lower-tier subcontracts.[21]
These same “Prompt Pay” provisions that apply to the owner and contractors are required in private construction general contracts. In any construction general contract, the parties shall include a provision that requires the owner to pay such general contractor within sixty (60) days of the receipt of an invoice following satisfactory completion of the work.[22]
Curiously, material suppliers with no on-site presence do not have the protection of this Prompt Pay law, at least on private projects.[23] This law will impact suppliers’ customers more than the suppliers themselves, although it impacts suppliers indirectly and probably means they are more likely to receive payment.
Any subcontract shall be deemed to include a provision that requires a “higher-tier contractor” to pay a “lower-tier subcontractor" within sixty (60) days of satisfactory completion of the work or within seven (7) days after receipt of payment from the owner, whichever is earlier.[24]
Any public subcontract must require each subcontractor to include the same payment and interest requirements in any lower-tier subcontracts. This lower-tier subcontract requirement does not exist in the private Prompt Pay statute. It is not clear whether this results in any difference in enforcement or application.
There are also significant differences between private general contracts and private subcontracts. In any private general contract:
An owner shall not be required to pay amounts invoiced that are subject to withholding pursuant to the contract for the general contractor's noncompliance with the terms of the contract. However, in the event that an owner withholds all or part of the amount invoiced by the general contractor under the contract, the owner shall notify the general contractor, in writing and with reasonable specificity, of his intention to withhold all or a part of the general contractor's payment with the reason for nonpayment.[25]
However, in any private subcontract:
. . . . in the event that a contractor withholds all or a part of the amount invoiced by any lower-tier subcontractor under the contract, the contractor shall notify the subcontractor, in writing, of his intention to withhold all or a part of the subcontractor's payment with the reason for nonpayment, specifically identifying the contractual noncompliance, the dollar amount being withheld, and the lower-tier subcontractor responsible for the contractual noncompliance.[26]
This puts general contractors and lower-tier subcontractors in a difficult administrative position with their subcontractors. There is also some question whether the last portion is workable from a practical point of view.[27]
The penalty for failure to give the required notice is not clear.[28] What happens if no notice is sent? Does the higher-tier contractor lose the right to charge back for the noncompliance? Is there no penalty?
All parties, and especially general contractors, need to police payments carefully and comply with the notice of withholding requirements. General contractors and higher-tier subcontractors should add and enforce requirements of complete written lists of all sub-subcontractors and material suppliers and prohibit the supply of any labor or material from unapproved sub-subcontractors and suppliers. This is especially important in light of potential higher-tier contractor liability for the unpaid wages and benefits of the employees of lower-tier subcontractors.[29] General contractors should add and enforce requirements of progress payment waivers and sworn affidavits of the payment of all employee wages and benefits by all approved sub-subcontractors and their lower-tier sub-subcontractors at each progress payment.[30]
The Prompt Pay provisions for private general and subcontracts states that “Nothing in this subsection shall be construed to apply to or prohibit the inclusion of any retainage provisions in a construction contract.”[31] Owners and general contractors may push to increase retainage percentages or create more conditions precedent to release of retention.[32]
Maryland Prompt Pay Statute
On any Maryland state public project, a general contractor must promptly pay subcontractors undisputed amounts within 10 days after receipt of a progress payment or final payment.[33]
The Maryland legislature has also written a Prompt Pay provision into every private construction contract in the state of Maryland. A contractor or subcontractor who does work or furnishes material under a contract shall be entitled to prompt payment.[34]
If a general contract does not provide specific dates or times for payment, the owner must pay the contractor “undisputed amounts” within the earlier of 30 days after an occupancy permit is granted or the owner takes possession of the property.[35] If the contract does provide specific dates for payment, the owner must pay “undisputed amounts” within seven days after the time specified in the contract.[36]
There are similar rules for lower tier subcontracts. Any higher tier contractor on a project must pay all “undisputed amounts” to its subcontractors or suppliers within seven days after receipt of funds.[37]
If a court finds that an owner or contractor has violated a prompt pay statute, the court can order payment and award interests and costs.[38] If the court also finds that the owner or contractor “acted in bad faith by failing to pay any undisputed amounts,” the court may award reasonable attorney’s fees.[39]
If a general contractor has provided performance and Payment bonds on a private project, retention on the contract may not exceed five per cent (5%).[40] The retention on a subcontract or lower tier sub-subcontract may not exceed the retention held on the higher tiered contractor.[41] Undisputed amounts retained by an owner must be paid within 90 days after substantial completion.[42]
This Prompt Pay statute does not apply to government contracts, any contract under one hundred thousand dollars ($100,000), the construction and sale of a single family dwelling, any transaction under the Custom Home Protection Act or a home improvement contract by a contractor licensed under the Maryland Home Improvement Law.[43]
[1] Prompt Payment Act, 31 U.S.C.A. §3901, et seq.
[2] Pursuant to the Contract Disputes Act, 41 U.S.C.A. §7109 (a) and (b), the rate of interest charged for late payments is established by the Secretary of the Treasury, and published in the Federal Register. https://www.federalregister.gov/documents/2017/07/24/2017-15456/prompt-payment-interest-rate-contract-disputes-act
41 U.S.C.A. §7109 (d)(1) and (2)[ Rate.-Interest shall accrue and be paid at a rate which the Secretary of the Treasury shall specify as applicable for each successive 6-month period. The rate shall be determined by the Secretary of the Treasury taking into consideration current private commercial rates of interest for new loans maturing in approximately 5 years.].
[3] 31 U.S.C.A. §3901(a)(3) ["proper invoice" is an invoice containing or accompanied by substantiating documentation the Director of the Office of Management and Budget may require by regulation and the head of the appropriate agency may require by regulation or contract]; FAR 52.232–27(a)(2).
[4] 31 U.S.C.A. §3901(a)(3); FAR 52.232–27(a)(1).
[5] FAR 52.232–27(c)(1)
[6] FAR 52.232–27(c)(3)
[7] FAR 52.232–27(d)(1)
[8] FAR 52.232–27(d)(2) & (3).
[9] Prompt Payment Act, 31 U.S.C.A. §3901, et seq.
[10] 49 CFR, Part 26, Section 26.29 (a) and (b).
[11] 31 U.S.C.A. §3901(d)(1) and (2).
[12] DC Code Section 27-131, et seq.
[13] DC Code Section 27-134.
[14] DC Code Section 27-131 (3)(C)[“Subcontractor” means a person, entity, or business that performs work on a construction site for a contractor or another subcontractor or that fabricates materials off-site, from plans and specifications unique to the project, for installation on the construction site].
[15] DC Code Section 27-132 (a).
[16] DC Code Section 27-132 (c).
[17] DC Code Section 27-134 (a). DC Code Section 27-134 (b) & (c) state that a pay if paid provision may not abrogate or waive the right of the subcontractor to: (b) (1) Claim a mechanics’ lien; or (2) Sue on a contractor’s bond. (c) Any provision of a contract made in violation of subsection (b) of this section is void as against the public policy of the District.
[18] DC Code Section 27-133; DC Code Section 27-135.
[19] Former Va. Code Anno. §2.2-4354 (1) (Michie 1950), now Va. Code Anno. §2.2-4354 (2) (Michie 1950).
[20] It may not be possible to avoid the one percent (1%) per month in the subcontract. It may be necessary to include different interest rate in the general contract. Virginia Code Anno. §2.2-4354 (4) & (5) states that “any contract awarded by any state agency shall include an interest clause that obligates the contractor to pay interest to the subcontractor and "unless otherwise provided under the terms of this contract, interest shall accrue at the rate of one percent per month."
[21] Virginia Code Anno. §2.2-4354 (5).
[22] Va. Code Anno. §11-4.6 (B) (Michie 1950). It is not clear the result if the parties fail to include the Prompt Pay provision.
[23] Va. Code Anno. §11-4.6 (D) (Michie 1950) states that "’General contractor’ and ‘subcontractor’ have the meanings ascribed thereto in § 43-1, except that those terms shall not include persons solely furnishing materials.” Va. Code Anno. §2.2-4354 does not adopt the definitions in Va. Code Anno. §43-1 (Michie 1950) or the specific exclusion of “persons solely furnishing materials.”
[24] Va. Code Anno. §11-4.6 (C) (Michie 1950). It is not clear why public and private general contracts must affirmatively include this Prompt Pay provision, while public and private subcontracts “shall be deemed to include” the provision. It is also not clear whether this results in any difference in enforcement or application. A court might decide a private general contract is “deemed to include” the provision or a court could decide there is no enforceable Prompt Pay provision in a private general contract, unless the parties affirmatively included it.
[25] Va. Code Anno. §11-4.6 (B) (Michie 1950).
[26] Va. Code Anno. §11-4.6 (C) (Michie 1950).
[27] Va. Code Anno. §2.2-4354 (Michie 1950). However, this requirement is not effective until “satisfactory completion” of the subcontract work and is not applicable to amounts “reducible pursuant to a breach of contract by the subcontractor.” “Satisfactory completion” is not defined and could be defined in the subcontract as acceptance of the work by the owner and acceptance of an invoice by the owner.
[28] The two statutes also have a different standard for withholding payment. Under Va. Code Anno. §2.2-4354 (Michie 1950), an owner on a public or private contract and a general contractor on a public contract can withhold payment for “noncompliance with the terms of the contract.” However under Va. Code Anno. §11-4.6 (C) (Michie 1950), on a private project, a “higher-tier contractor” shall not be liable for amounts otherwise reducible pursuant to a breach of contract by their subcontractors or subcontractors. It is not clear whether this results in any difference in enforcement or application.
[29] Va. Code Anno. §11-4.6 (D) & (E) (Michie 1950).
[30] There is also some confusion in the use of the terms “general contractor,” “contractor,” “higher-tier contractor,” and “lower-tier subcontractor.” [30] It is not clear whether this public contract law § 2.2-4354 or the private contract law § 11-4.6 (C) applies to prohibit Pay if Paid clauses in sub-subcontracts between subcontractors and any lower-tier subcontractors. If payment is withheld, it is also not clear whether the requirement to specifically identify any contractual noncompliance and the lower-tier subcontractor responsible applies only to subcontractors or also apply to third tier and even “lower-tier subcontractor[s].
[31] Va. Code Anno. §11-4.6 (B) & (C) (Michie 1950).
[32] In any event, the deadline for payment of retention on public contracts is not clear. The deadline for payment of retention on private contracts would be within sixty (60) days of satisfactory completion or within seven (7) days of receipt of payment from the owner under the Prompt Pay provisions.
[33] COMAR 21.07.02.05-2.
[34] Maryland Real Property Code Section 9-302(a).
[35] Maryland Real Property Code Section 9-302(b)(1)(i).
[36] Maryland Real Property Code Section 9-302(b)(1)(i). Under Maryland Real Property Code Section 9-301 (f) "Undisputed amount" means an amount owed on a contract for which there is no good faith dispute, including any retainage withheld.
[37] Maryland Real Property Code Section 9-302(b)(3); Capitol Indem. Corp. v. Mountbatten Sur. Co., 2001 U.S. Dist. LEXIS 207 (D. Md. 2001).
[38] Maryland Real Property Code Section 9-303(a) Capitol Indem. Corp. v. Mountbatten Sur. Co., 2001 U.S. Dist. LEXIS 207 (D. Md. 2001) [Awarding of interest and costs depends on whether the amount owed is undisputed. Where the parties disagreed on the amount owed, the court denied interest and costs].
[39] Maryland Real Property Code Section 9-303(b); Capitol Indem. Corp. v. Mountbatten Sur. Co., 2001 U.S. Dist. LEXIS 207 (D. Md. 2001).
[40] Maryland Real Property Code Section 9-304(c)(1).
[41] Maryland Real Property Code Section 9-304(c)(2) and (3).
[42] Maryland Real Property Code Section 9-304(e).
[43] Maryland Real Property Code Section 9-305.