California Prompt Payment

Construction payments come slowly, and sometimes, they don’t come at all. It’s unfortunate, but it’s true. Believe it or not, payments might come even more slowly if not for prompt payment acts. These laws exist nationwide (though they can vary significantly from state-to-state) and serve to create timelines for when payments must be made, and institute interest penalties for late payments. While making a claim under prompt payment laws can be a task, claimants can leverage prompt payment laws to speed up payments without bending over backward.

In this article, we are going to take a look at California’s Prompt Payment Act.

There are a lot of variables here, but we’re going to keep things simple and break it down piece by piece. The first half of this post will cover private construction jobs. If you work on public projects, scroll down a little further!

With that being said, let’s take a look at some of the details from the California prompt payment act.

The California Prompt Payment Act for Private Projects

Owners → Direct Contractors

Progress Payments. An owner must pay a direct contractor within 30 days of the contractor’s request for payment. But that’s not written in stone, per se. There are exceptions :

  • (1) if parties agreed to another time frame in the contract, or
  • (2) there is a good faith dispute over payment due.

A good faith dispute isn’t a license to withhold everything, though – an owner may only withhold up to 150% of the amount in dispute.

Retainage. If retainage is being withheld, the owner must pay it within 45 days after completion of the improvement (unless a good faith dispute exists regarding that retention). An owner may withhold up to 150% of the disputed amount. But, if the contractor corrects or completes the disputed work (and sends notice that the fix is complete), that work must be accepted or rejected within 10 days. Note: parties cannot modify retainage by contract like they can with progress payments. 

Direct Contractors → Subcontractors

Progress Payments. GCs must pay subcontractors within 7 days of receiving each progress payment relating to that sub’s work. The same exceptions that apply to direct contractors (above) also apply to subs. That means the timeframe can be changed by contract, and payment can be withheld for a good faith dispute (up to 150% of the amount in dispute). 

Retainage. The GC must pay retention to subcontractors within 10 days of receiving retention payments from the owner. If the GC is withholding retainage from a subcontractor until that sub corrects or completes their work, the GC must accept or reject that sub’s work within 10 days of the fix. If accepted, the GC must pay retention relating to that work within 10 days.

Subcontractors → Lower Tiers

The same rules that apply between a direct contractor and sub also apply between subs and lower tiers!

Penalties for Private Jobs

When progress payments or retainage payments are being improperly withheld on private jobs, a 2% per month interest penalty can be applied to the payment.

Essential Resource: California Prompt Payment FAQs


The California Prompt Payment Act for Public Projects

Public Entity → Direct Contractors

Progress Payments. The rules may actually vary depending on the type of public entity… In particular, the California State University system must pay direct contractors within 39 days after receipt of an undisputed payment request. State & local agencies must pay progress payments within 30 days after receiving such a request. Payment requests that are rejected must be returned to the direct contractor with a written explanation within 7 days.

Retainage. Retention withheld by a public agency must be released within 60 days of completion of the work of improvement.

Direct Contractors → Subs

Progress Payments. Rules governing prompt payment to subs are generally the same for public and private projects. General contractors must pay subs within 7 days of receiving a progress payment relating to that subcontractor’s work. The timeframe can be changed by contract, and payment can be withheld for a good faith dispute (up to 150% of the amount in dispute). 

Retainage. When a GC withholds retention from a sub, they must pay the sub their portion of the retention within 7 days (as opposed to 10 on private projects) after receiving all or a portion of the retention. The same retention exceptions apply here as well. If a good faith dispute exists, the contractor may withhold from retention to the sub an amount not exceeding 150% of the amount in dispute. These provisions may not be modified or waived by contract.

Subcontractors → Lower Tiers

The same rules that apply between a direct contractor and sub also apply between subs and lower tiers!

Penalties for Public Jobs

If a progress payment is being improperly withheld by the public entity, the same penalties will apply for all project types: 10% interest per year. If the public entity improperly withholds retention, the interest penalty is 2% per month. For everyone else, the penalty is 2% per month for both retention and progress payments. 

Summary
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California Prompt Payment Act: What Contractors Need to Know
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The California prompt payment act dictates the timelines for making payments on public and private construction projects. If payments aren't made on time, interest penalties will come into play. Essential reading for California contractors.
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levelset
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