- Emergency Consultation Services
- FMG BlogLine
By: David Molinari
In the construction industry, payments come slowly. Prompt payment laws exist in some form nationwide and can vary from state to state. These laws serve to create timelines for when payments must be made and institute interest penalties for late payments. In California, the contractors are armed with Civil Code 8800 et al. California’s Prompt Payment Act. The Prompt Payment Act covers private projects; while the Public Contract Code 10260 and 20104, et al. governs public works.
With respect to private projects, such relationship as an owner and direct contractor, the owner must pay a direct contractor within 30 days of that contractor’s request. There are exceptions to the 30-day time limit: First, if the parties agree to another timeframe in their contract; or if there is a “good faith dispute.” A good faith dispute cannot be used as a license to withhold payment to the contractor. An owner may withhold up to 150% of the amount in dispute. If retainages are being withheld, the owner must pay retentions within 45 days after competition of the improvement. If the contractor corrects or completes the disputed work and sends a notice of the correction, the owner must then accept or reject the work within 10 days.
For the director contractor and subcontractor relationship, the general contractor must pay subcontractors within seven days of receiving each progress payment related to that subcontractor’s work. These timeframes may be changed by the contract between the general and the subcontractor. The good faith dispute also applies to payments in this relationship. As for retainage, the general contractor must pay retention to the subcontractor within 10 days of receiving retention payment from the owner. If a general contractor withholds retainage from the subcontractor for correction or completion of their work, the general contractor must accept or reject the subcontractor’s work within 10 days of the correction. When payments are being improperly withheld, a 2% per month interest penalty begins to apply.
California’s Prompt Payment protection also applies to public projects. With respect to the public entity direct contractor relationships, the timeframes vary depending on the public entity that is a party to the construction contract. State and local agencies must pay progress payments within 30 days after receiving requests. Any requests that are rejected must be returned to the direct contractor with a written explanation within seven days. Retentions must be released within 60 days of completion of the work of improvement.
Direct contractors on public works and their subcontractors also must follow set timelines; with the rules generally the same as private projects. The general contractor must pay subcontractors within seven days of receiving a progress payment relating to that subcontractor’s work. Timeframes can be changed by the written contract and the good faith dispute for withholding payment also applies.
When a general contractor withholds retentions from a subcontractor, those retentions must be paid within seven days after receiving all or a portion of the retention. Progress payments improperly withheld begin to accrue 2% monthly interest.
Making a claim under the Prompt Payment Acts is the contractor’s best leverage to secure receiving compensation for work provided.
If you have any questions or would like more information, please contact David Molinari at [email protected].