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 tardy, contractors and suppliers may be eligible to make a claim under the state’s prompt payment laws to collect interest, demand attorney fees, or 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 whether work was performed on a state project, a federal project, or a private project. Further, the payment timeframe will be different depending on whether 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 and determine exactly which payment requirements apply to a project.
Step 2: Make The Demand
The next step is to make a formal demand for payment, and specifically mention the prompt payment statute and remedies. The demand should specifically mention that payment is tardy and that claim is being made for penalties, interest, attorney fees, and any other remedies available under the associated prompt payment act. The demand should identify the statute by name, and should ideally reference the statute number. Further, the demand should be sent by certified mail, and should include specific information about the payment being requested.
It is important to note that this formal demand may or may not be required. 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.
While some states may not require a specific demand, most states do require that the party making a prompt payment claim show that payment was requested. This formal demand, therefore, gives the claiming party an opportunity to make the payment request formal and tracked.
Summary of What To Include within a Prompt Payment Demand:
- 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
Step 3: Consider Other Actions and Options
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 whether to secure the claim through a mechanics lien filing or bond claim.
Parties need not choose between a prompt payment demand or a mechanics lien filing. Both remedies are available. Companies should be cautious about their lien filing timeframes, as 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.