What Contractors Need to Know About Prompt Payment Statutes in Construction

Prompt payment statutes are laws enacted at the federal and state levels that set specific deadlines for payment and limit the amount of retention that can be withheld on construction projects. These statutes can apply to both public and private construction work, depending on the jurisdiction, and are designed to ensure that contractors, subcontractors and suppliers are paid promptly and fully for their work.

The importance of these statutes cannot be overstated. Late and improperly withheld payments can derail project timelines, increase the cost of financing for contractors and even lead to insolvency for smaller subcontractors. These statutes play a critical role in maintaining financial stability and operational continuity for various stakeholders in the construction industry, helping to reduce cash flow issues and protect these entities from improper payment withholdings. Understanding the nuances of prompt payment statutes is essential not only to ensuring legal compliance but also for maintaining positive working relationships and managing risk.

Types of Prompt Payment Regimes

Understanding the type of prompt payment regime in place in a particular jurisdiction is fundamental to risk management. These regimes generally fall into three categories:

•  Strict Compliance States – Laws in these states set specific triggering events (e.g., submission of a proper invoice) and payment deadlines that are inflexible and cannot be altered by contract. For example, Massachusetts’ prompt payment law mandates specific timelines for monthly invoice submittal, as well as owner review and approval of payments applications. These prompt payment terms cannot be altered in the contract.
• Default Rule States – Statutes in these states provide a baseline framework that establishes relevant prompt payment terms, including what triggers a contractor’s right to payment and how promptly payment must thereafter be made. Parties are allowed, however, to modify the rules through express contractual provisions. New York is a classic default rule jurisdiction: If the contract does not specify a payment timeline, the statutory default applies. However, parties are free to agree to different terms.
• States Without Prompt Payment Statutes – Some jurisdictions, like New Hampshire, have no specific prompt payment statutes, relying instead on general contract law or Uniform Commercial Code (UCC) principles. In these states, payment terms must be carefully defined in the contract, and enforcement relies heavily on breach of contract claims. In other jurisdictions, including North Carolina and Rhode Island, prompt payment statutes only address prompt payment in connection with public contracts; payment terms in private contracts are left unregulated.

Public versus Private Statutes

Many jurisdictions have enacted prompt payment statutes that differentiate between public and private contracts. Public prompt payment statutes govern payments on government-funded projects and typically impose strict deadlines for agencies to pay contractors, often with mandatory interest penalties for delays. Private statutes apply to contracts between private entities and often allow more contractual flexibility. Contractors on public projects often face limited negotiation power but enjoy stronger statutory protections. Although private contractors are also often protected by default, they must carefully negotiate payment terms to ensure they are not waiving their statutory rights or weakening their ability to receive timely compensation.

In New York, for example, public contracts are governed by the State Finance Laws, which require that contractors be paid within 30 days after the agency receives a proper invoice (with special rules on payment timing for small businesses and municipal contracts). Contractors then must pay subcontractors within seven days of receiving payment. By contrast, New York’s private prompt payment statute establishes default rules requiring payment to the contractor within 42 days of receiving an invoice (12 days to review the invoice and 30 days to pay), with subcontractors receiving payment within seven days after the contractor receives payment. New York law, however, allows parties in a private contract to negotiate different payment terms – something not available to parties in a public contract.

Prompt Payment Triggers

The event that “triggers” payment timelines is a crucial concept. Most prompt payment statutes define a specific event that starts the payment clock ticking. Common triggers include:

• Receipt of an undisputed and proper invoice.
• Delivery of goods or services.
• Completion of a payment milestone (e.g., substantial or final completion).
• Receipt of grant money (in public contracts).

In New Jersey and Connecticut, for example, the prompt payment period begins as of the “billing date,” and the owner has 30 days to pay any undisputed amounts from the date it receives a compliant invoice. On public contracts in Alaska, the payment deadline is tied to the owner’s receipt of federal or state grant money. For public contracts involving the Florida Department of Transportation, state law regulates the issuance of final payments, which must be made within 74 days of “final acceptance.” Knowing the relevant trigger in your jurisdiction is critical to ensuring compliance with applicable laws.

Flow-Down to Subcontractors

Prompt payment obligations do not stop with the prime contractor. Most statutes contain provisions that mandate the “flow-down” of payment to lower-tier subcontractors and suppliers. In jurisdictions with strong prompt payment laws, the timing of paying subcontractors is directly tied to when the general contractor receives payment from the owner.

In New York, for instance, once a contractor receives payment, it must pay its subcontractors within seven days. Failure to do so can expose the contractor to interest penalties and potentially breach-of-contract claims. Similarly, New Jersey law requires payment within seven or 10 days (depending on the type of contract) of when the upper-tier contractor receives payment.

Contractors need to be aware of these downstream obligations. Subcontractors must be vigilant in understanding these timelines and should consider including language in their subcontracts that mirrors the statutory requirements to protect their rights.

Penalties for Noncompliance

Noncompliance with prompt payment statutes can have serious consequences, ranging from interest penalties to other legal liability. Many statutes impose interest on late payments, often at a statutory or contractually specified rate. For example, in New Jersey, interest accrues at the prime rate plus 1% for late payments. Similarly, in Washington, D.C., the interest rate is set at 1.5% per month for payments delayed beyond the statutory deadline.

Some jurisdictions also provide for attorneys’ fees and court costs if the payee must initiate legal action to recover unpaid amounts. Massachusetts’ statute is particularly robust, providing that a payee may suspend work after 30 days if timely payment is not made on undisputed invoices, with the contract schedule adjusted accordingly.

Prompt Payment Statutes and Retention Withholding

Retention is a common practice in construction contracts where the owner withholds a portion of the payment until a certain event occurs, such as substantial completion or a percentage threshold of work is reached. In addition to regulating payment timing, prompt payment statutes often dictate the amount of retention and the “completion” event that will entitle the contractor to release of part or all of the retention.

Many statutes require release of retention upon achieving substantial or 50% completion of the work. For example, in public contracts in Maryland, the owner is entitled to withhold up to 5% on fully bonded projects (although the Maryland Transportation Authority has a special exemption to withhold any amount it believes is necessary to protect the state’s interest), but those funds must be released within 120 days of “satisfactory” completion. Owners in private contracts in Maryland are similarly only permitted to withhold 5% on fully bonded projects, but retainage must be released within 90 days of “substantial” completion. In both cases, the contractor is required to release retainage to its subcontractors after the owner releases it (seven days on private projects versus 10 days on public projects). North Carolina allows contractors involved in public contracts to seek payment of retention once the project reaches 50% completion, although any remaining retention must be paid within 60 days of substantial completion.

Neighboring Virginia, by contrast, does not regulate the retention amount in private contracts, leaving that to the parties to negotiate. Retention on public contracts is capped, however, at 5%. In both cases, Virginia law does not specify when retention must be released.

Takeaways and Best Practices

Compliance with prompt payment statutes requires careful attention to contract drafting, internal invoicing procedures, and payment workflows. Key best practices include:

•  Know Your Jurisdiction: Ensure that you understand the specific statutes applicable in each state where you do business, particularly distinctions between public and private work.
• Draft with Precision: Use clear and compliant payment terms in your contracts. Where default rule statutes apply, consider whether the default or a negotiated term better suits your needs.
• Monitor Payment Triggers: Train project teams to recognize when payment clocks begin, such as upon receipt of a proper invoice or completion of certain project milestones.
• Enforce Flow-Down: Ensure subcontractor agreements mirror prompt payment obligations and payment schedules.
• Document Everything: Maintain detailed records of invoices, payment certifications, and correspondence to support any enforcement or defense of payment claims.

Understanding and adhering to applicable prompt payment statutes is not only a matter of legal compliance but also essential to maintaining the financial health of a construction project.