Prompt payment laws, first enacted by the federal government and later by states, provide legal recourse when owners and contractors fail to meet their payment obligations. More often than not, construction contracts specify payment terms, but prompt payment laws provide an additional layer of security with maximum time limits for payment. But contractors shouldn’t assume that the law automatically guarantees fast payments. Prompt payment laws require your participation to truly be effective. For general contractors, subcontractors, and suppliers, proactive steps include writing a prompt payment demand letter.
In this article, we’ll walk through the steps a contractor can take to write and a letter that demands payment under prompt payment laws. We’ll also talk about what to do if that demand is ignored.
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The problem with construction payments
On construction projects, payment operates in a waterfall fashion. The project owner pays the GC, who then pays subcontractors, who then pay their suppliers. This structure has several disadvantages for parties at the bottom of the waterfall.
First, subs typically don’t get paid until the GC gets paid by the owner. If the owner delays payment, then the subs and suppliers at the bottom of the waterfall have to wait even longer. Additionally, the payment structure creates a risky blind spot for subs. While they aren’t able to see the negotiations or payments between the owner and GC, they are still affected when the owner doesn’t pay on time.
In short, these payment problems are the main reason why prompt payment laws were created in the first place.
What are prompt payment laws?
Prompt payment laws exist at both the federal and state level, for both public and private projects. From promoting accurate accounting of cash flow and working capital to ensuring contractors and subs get paid in a timely fashion, prompt payment laws benefit all parties involved with the payment process. Here’s what you need to know about the various types of prompt payment laws and how they may affect you.
For a helpful guide to prompt payment laws in all 50 states, visit Prompt Payment Guide & FAQs. Once there, select your state from the drop-down menu to view the specific prompt payment statute, requirements, and penalties.
Federal prompt payment laws
Prompt payment acts first covered government contracts with public entities. Federal prompt payment laws were designed to encourage timely payments, thereby avoiding more severe measures. For example, when an unpaid party has to file a surety bond claim.
The Prompt Payment Act of 1982 entitled contractors to recover interest at a set rate when the federal government failed to make timely payments, and required general contractors to pay subcontractors in a timely fashion. Six years later, Congress amended the Act specifically for construction contracts to include time limits for payment, interest rates and specific mandates such as contractors must pay interest on any amount they were paid but didn’t earn.
State prompt payment laws for public projects
States responded to these federal measures with prompt payment laws of their own. Today, almost every state has legislation for public projects that entitles late-paid contractors to financial compensation through penalties, interest fees and attorney fees.
The details around when, if and how much a contractor or sub gets paid could hinge on the prompt payment laws in your state. What is considered ‘prompt’ varies from state to state, but generally speaking, the owner should pay the prime contractor within 30 days of receipt of invoice, and the prime contractor should pay subcontractors within one to two weeks.
State prompt payment laws for private projects
There seem to be more exceptions than rules in states’ prompt payment laws – and you’ll see the greatest differences between states on prompt payment requirements for private projects. States like Arizona, for example, have only slight variations between private and public projects. They assess an interest rate of 1% on late payments for public projects and 1.5% for private projects.
Whereas in the state of Colorado, prompt payment deadlines and penalties only apply to public projects with a total contract price of more than $150k. Likewise, Arkansas only has prompt payment laws for public projects, but scales back even more by only setting payment deadlines and interest penalties for payments from a public entity to the GC.
Making your prompt payment demand
A prompt payment demand is basically a notice that the party above you is in violation of the law, that payment is due immediately, and that interest or other penalties may be required.
Contractors can make this demand by sending a prompt payment demand letter. This is similar to a typical demand letter (also known as a dunning letter), but with an important difference. This letter will reference prompt payment requirements and penalties specifically.
A proactive payment demand letter not only pressures the hiring party to pay. If you take your claim to court, a demand letter serves as evidence that you requested payment. In fact, proof of a payment demand is required in some states.
What to include in a prompt payment demand letter
To qualify for all prompt payment benefits, reference the relevant prompt payment laws in your demand letter. The more specific you can be about what the law says and the penalties that apply, the more effective your letter will be. Being specific improves your ability to recover payment, as well as any applicable interest, attorney fees, and other penalties.
A prompt payment demand letter should include:
- The statute number that applies
- The prompt payment deadline as stated by law
- Interest and other penalties
- Reasons why you believe the party violated prompt payment law
- The amount they owe
To ensure a proper paper trail in case of later legal issues, it’s a good idea to send your prompt payment demand letter via certified mail, so that you retain receipt of shipment and/or delivery.
Example of language to use in a prompt payment demand letter
Here is an example of the specific information that you should consider including in a prompt payment demand letter. For this example, the party writing the letter is a subcontractor on a private project in Texas:
1. State the statute – and what it requires for your specific project
Tex. Prop. Code §§ 28.001 – 28.010 requires that, on private projects, a hiring party other than a property owner must pay a sub-tier participant within 7 days of receipt of payment from above.
2. State penalties for late payment
In the event payment is not made timely, Texas law requires that interest in the amount of 1.5% per month be added to the outstanding amount. Additionally, attorneys’ fees may be awarded by the court in an action to recover payment.
3. State why you believe the recipient is in violation
Upon information and belief, more than 7 days have elapsed since you received payment.
4. State your demand
Accordingly, we hereby make a demand for payment pursuant to the above referenced statutes. In order to avoid the accumulation of additional interest and attorneys’ fees, please immediately provide payment in the amount of $____ to ____.
Need more help writing your demand? Download the free prompt payment demand letter template from Levelset.
What if your prompt payment demand isn’t successful?
In the case that the owner or GC ignores your prompt payment demand letter, here are two effective follow-up actions:
- File a prompt payment claim in court
When a prompt payment demand letter goes unanswered, you can file a civil court claim against the hiring party. In some states, contractors that are successful in their civil claim are entitled not only to the payment amount. They may also be awarded attorney fees (depending on the statute) and interest that accrues from the date the payment was deemed late.
- File a mechanics lien or bond claim
If you aren’t paid for work you’ve completed, you can also file a mechanics lien (if a private project) or a bond claim (if a public project).
While either of these options can help you recover payment, filing a lien or bond claim won’t enable you to claim the penalties or fees you may be eligible for under prompt payment laws. States typically won’t allow you to claim additional amounts in a mechanics lien or bond claim.
Keep in mind that prompt payment deadlines and mechanics lien deadlines are different. For these reasons, you should treat them as separate but equally important protective measures. Even if you’re pursuing a claim under prompt payment laws, make sure you’re filing any documents or notices you need to protect your lien rights.