If you’re worried about getting paid for a construction job, or your payment is LONG overdue, you’re probably already brainstorming ways to light a fire under the GC or owner. Should you call a lawyer? Duct tape their door shut? Walk off the job? Before you go to any of these lengths to spur payment, you should understand the power of your state’s prompt payment law, and how to use it to get paid without filing a lawsuit.
Getting paid for the work you do on a construction project can be hard. And for too many contractors, filing a lawsuit is the go-to move to recover payment – even though it’s an incredibly expensive and time-consuming proposition. Prompt payment laws effectively put financial pressure on a property owner or contractor to pay on time.
Nobody likes a lawsuit
A friend of mine, a talented attorney, once told me, “A lawsuit is a process designed in such a way that only one person gets any benefit from it: The lawyer. Everyone else just loses.” Anyone who has been involved in a lawsuit would probably agree with that sentiment. A lawsuit is an expensive process that can take years to settle.
Lawsuits are a time-consuming process requiring a lot of your attention, instead of attention to your construction projects, that can’t guarantee a positive outcome out of it. If you are lucky enough and evidence is robust and irrevocable, then you could probably be the prevailing party.
If you ever go into a lawsuit, be prepared to provide sufficient evidence of a contract breach with updated schedules, photo evidence, forensics analysis and a lot of other burdens that will cost you extra money, just to be prepared for the trial process.
Prompt Payment laws give you a legal right to get paid quickly
These statutes provide everyone on a construction project — contractors, subcontractors, and suppliers — with the legal right to get paid on time. Prompt payment is part of federal regulations, and written into statutes in almost all 50 states. Only one state – New Hampshire – does not have prompt payment laws.
Prompt payment laws:
- Specify when your payment is due. Each party on a construction project has a deadline to pay the parties below them. That deadline may be as early as 7 days from invoice approval up to 45 days.
- Add an interest penalty on past due invoices automatically. Penalties can be higher than 10% per year, so the longer it takes the property or GC to pay you, the more you can eventually claim.
- May allow you to recover legal fees – if it gets to that point.
In most states, prompt payment laws apply to both public and private projects. In others, they only apply to public projects. The specific deadlines and penalties vary state-to-state, so you’ll want to review the rights you have in the state where your project is located.
Free Download: Prompt Payment Laws in All 50 States – A Comprehensive Guide
Why don’t more contractors use prompt payment laws to get paid?
Prompt payment laws may be some of the most powerful – but least used – remedies for non-payment available to construction businesses. So why don’t contractors use these laws more often?
Most construction businesses don’t use their state’s prompt payment law because they:
- Have never heard of it
- Worry about hurting their relationship with the GC
- Don’t realize that they should be getting paid faster
- Are confused by the legal language
Construction payments take a long time, and most contractors and suppliers accept this as the status quo. They often don’t realize that these laws give them the right to get paid faster. On top of that, many contractors worry about doing anything to upset the apple cart. They think if they’re patient enough, they’ll get paid for their work eventually.
But dealing with late payments comes with a heavy cost. While you’re waiting for the property owner or GC to pay, you still have to meet your own labor and material expenses. That can mean paying interest on a short-term loan to cover your costs in the meantime, or using savings to pay your bills instead of putting that cash to work growing your business.
Get paid: Send a prompt payment demand letter
So often on construction projects, the parties at the top of the project don’t know all of the companies that are working on the job. Sometimes, a late or missed payment is simply the result of poor communication between the people who are responsible for payment. A prompt payment demand letter is an effective way to clear any communication blockages and get the attention of the party who owes you money.
What’s a prompt payment demand letter?
A demand letter, also known as a Dunning letter, can be a very effective tool to “encourage” the property owner or GC to pay. A prompt payment demand letter uses prompt payment laws and penalties to make it clear to the recipient that refusing to pay will be a painful proposition for them.
A prompt payment demand letter can range in tone from a casual reminder to a menacing threat. Of course, your relationship with the hiring party will largely determine the tack you take here. What’s most important in an effective demand letter is that you’re specific about the amount of money owed, and the action that you plan to take if you aren’t paid.
Free download: Prompt Payment Demand Letter Template
In the case of prompt payment laws, the next action if you’re still not paid may be to take them to court. I know what you’re thinking – “This article promised I could get paid without a lawsuit!” You’re right – and that’s still the case. Keep reading; I’ll explain.
What to include in a prompt payment demand
Here are some of the specifics you’ll want to include in a prompt payment demand letter:
- The amount of money that the recipient owes you from your outstanding invoice. Include the invoice or pay application number to make it easier for them to look it up.
- The federal or state statute that applies. Referencing the specific law adds more weight to your demand, making it clear that the legal system is behind you.
- The amount of interest that the prompt payment law establishes. If interest has already begun accruing, include that amount.
If your state law provides for it, include:
- The penalties for legal and court fees that you may be entitled to.
- Your intention to stop work if payment is not received.
Not all states provide for legal and court fee reimbursement. Nor does every state prompt payment law allow you to stop work if you’re not paid. However, when they do, they typically require that you notify the GC and/or property owner in advance before you walk off the job. Including this language in your prompt payment demand serves as a stop work notice.
Enforce prompt payment with Alternative Dispute Resolution
Threatening interest penalties, mechanics liens, or legal action is often enough to get paid without taking further action. Sometimes, however, legal action is the last remedy available to pursue payment.
The good news here is that some state laws actually require – or strongly encourage – alternative dispute resolution for prompt payment claims instead of a lawsuit. Rather than a lawsuit, prompt payment claims may be decided by arbitration or mediation. In New York, for example, a court found that a contract provision requiring litigation was unenforceable in a prompt payment claim, because it contradicted the statute.
In other states, enforcing your prompt payment claim requires taking the case to civil court. If you do end up taking legal action, your prompt payment demand letter becomes extremely important. Some states require that you notify a party of the prompt payment law before you’re allowed to bring a suit against them. If you sent your prompt payment demand letter by certified mail, that proof of notification can strengthen your claim.
Prompt payment laws aren’t the only way to get paid
Contractors and suppliers have a number of remedies to get paid – prompt payment law is just one weapon in an arsenal available to you. While you’re preparing a prompt payment demand letter, you should still take care to preserve your right to file a mechanics lien. The deadlines for prompt payment are totally separate from state requirements to file a mechanics lien. In fact, as a Utah contractor found out on our Expert Center, you can still use prompt payment laws to recover payment even if the deadline to file a mechanics lien has passed.
Make sure you’re meeting the deadlines to send preliminary notice or a notice of intent to lien if they’re required. You should never stop pursuing a payment that you’re owed until the money is in your account. You can use these remedies in tandem to put additional pressure on the GC or property owner and get paid faster.