The construction industry frequently sees big, well-funded organizations contracting with smaller, capital-needy companies, and it’s no secret that subcontractors must navigate substantial working capital challenges. For this reason, the construction industry has well-established “prompt payment laws” in place to protect contractors and suppliers against slow and delayed payments.
If payment is late, contractors and suppliers may be eligible to make a claim under the state’s prompt payment laws. The claimant may be entitled to collect interest, demand attorney fees, or other penalties spelled out in the law. Contractors can also take steps prior to a claim that amplify the pressure to get their payment.
Here are the steps to make a claim under a state’s prompt payment law.
Step 1: Figure out which law applies
Contractors and suppliers must first determine which law applies. The prompt payment requirement will be different depending on
- The state that the project is located in
- Whether work was performed on a public/government project or a private project
- If the payment is from the owner to the prime contractor, the prime contractor to a sub, or a sub to a lower tier
California’s prompt payment laws are a good example of this. On California private projects, owners must pay general contractors within 30 days of receiving an invoice, and general contractors must pay subcontractors within 7 days. On California public university projects, however, owners have 39 days to make payment after receiving an invoice, and on public utility projects, general contractors have 21 days to pay subcontractors.
These nuances are commonplace, and so the first step is to examine the prompt payment laws in your specific state, and determine exactly which payment requirements apply to a project.
To view your state’s prompt payment requirements, select your state from the drop-down menu on the main Prompt Payment page.
Step 2: Write a prompt payment demand letter
The next step is to make a formal demand for payment using a demand letter. For prompt payment demands, specifically mention the prompt payment statute in the project’s state. The letter should specifically mention that payment is late and that you’re making a claim for the payment plus any penalties, interest, attorney fees, or other remedies available under the state’s prompt payment statute. The letter should identify the statute by name, and should ideally reference the statute number.
A formal demand may or may not be required. In some states, contractors can only file a prompt payment claim if they have proof of a request or demand for payment. Others don’t require it. Nevertheless, it’s always a good idea to send the demand. Sending the demand covers your bases in the event a notification was required, and otherwise, the notification will pressure the party to make payment and will clearly indicate your intention to seek fees and penalties.
Further, the demand should be sent by certified mail, and should include specific information about the payment being requested. Sending by certified mail provides proof that it was sent, in the event that the recipient claims they didn’t receive it.
Summary of what to include in a prompt payment demand letter:
- Indicate that you seek remedies under the prompt payment statutes, and identify the statute
- Specify that you request payment for certain invoices or payment applications
- Detail the items, services, and materials for which payment is requested
- Send the demand by certified mail
To learn more, read our Contractor Guide to Writing An Effective Prompt Payment Demand Letter.
If you’re not sure where to start, download this prompt payment demand letter template. The second page provides an example of what a completed letter would look like.
Step 3: File a prompt payment claim
Generally, to make a prompt payment claim, you will need to file a case against the late payer in civil court. The court will determine if your claim is valid, and what penalties are due according to the law. Most states apply interest penalties to late payments, and some allow the claimant to recover attorney or court fees.
While the prompt payment laws provide contractors and suppliers with a pretty powerful remedy, it is only one of the remedies available to them to get paid. Notably, it is an unsecured remedy, and those who are owed money should strongly consider an alternative:
Parties don’t need to choose between making a prompt payment demand on the one hand, or filing a lien or bond claim on the other. Both remedies are available in the event that payment is late or missing. Construction businesses should be cautious about their lien filing timeframes. It would likely be a mistake to let a lien filing deadline come and go while waiting on a response to a prompt payment demand.
However, note that many states don’t allow lien or bond claimants to include additional amounts beyond the payment itself. If a prompt payment violation adds interest or other financial penalties, you may not be able to include them in your filing.
Read more about prompt payment and payment speed in How Long Does a Contractor Have to Pay a Subcontractor?