Construction payment happens slowly. This is an unfortunate truth across the industry. Luckily, there are a number of tools that contractors, subs, and suppliers can use to combat slow payment.
The most powerful of these tools remains the ability to file a mechanics lien. But here’s another tool that helps to keep payments on track, and it doesn’t come with the strict notice and deadline requirements of lien claims: prompt payment laws.
Prompt payment laws exist in all 50 states, but in this post, we’re going to take a look at how the New Jersey Prompt Payment Act keeps the money moving in the Garden State.
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The New Jersey Prompt Payment Act
As stated above, the New Jersey Prompt Payment Act creates timelines for payment. If those timelines aren’t followed, penalties will come into play. And finally – in order to enforce those penalties, certain actions may need to be taken. So let’s break this down into three sections: 1) Timelines, 2) Penalties, and 3) Enforcement.
The timeline for payment is different depending on your role (see link below for more info on ‘role’). For contractors, payment must be made within 30 days after the owner has certified and approved the contractor’s invoice. But an owner can’t just sit on an invoice and wait to make payment. Within 20 days of receiving an invoice, an owner must either approve or deny it – and an owner must provide a written statement explaining why payment will be withheld. If no action is taken within that 20 days, the invoice is automatically approved, and payment must be made within 30 days.
Keeping track of the timeline: A contractor may have to wait 50 days before being paid on a given invoice (20 days to approve + 30 days to make payment).
Don’t worry, there are also rules for when subs and suppliers must be paid. For subs or suppliers hired by the contractor, if their work is accepted, payment must be made within 10 days of the contractor receiving payment. Note, of course, that payment will only be due for the services rendered at that time.
Keeping track of the timeline: A subcontractor could have to wait up to 60 days for payment (50 days for the contractor to be paid + 10 days after receipt).
For subs or suppliers hired by a subcontractor – the same rules apply. They must be paid within 10 days of when their customer receives payment.
Keeping track of the timeline: A sub-subcontractor or supplier to a sub may have to wait up to 70 days for payment (60 days for a first-tier sub to be paid + 10 days after receipt).
Note: Subcontractors, suppliers, and sub-subs/suppliers to subs can agree to some other timeframe in writing, but the above rules are the baseline for timing payments.
Rules are great, but they’re meaningless without penalties to enforce them. Under the New Jersey Prompt Payment Act, penalties come in the form of interest payments.
If payments are late based on the above timelines, the non-paying party will face interest of the prime rate plus 1%. At the time of this post, the prime rate sits at 5%. Thus, the interest penalty would be 6%. So if a contractor was late on a $2,500 payment, they’d owe $2,650.
Additionally, after providing 7 days written notice of the late payment, the unpaid party can suspend performance of their contract without penalty for breach of contract until payment is made.
However, performance may only be suspended if:
- (1) payment is late,
- (2) the customer has given no written statement re: the amount and reason for withholding payment, and
- (3) the customer is putting forth a good faith effort to resolve the reason for withholding.
Further Reading [Spoilers Ahead]:
The New Jersey Prompt Payment Act may not have the strict notice and deadline requirements found in lien law, but enforcing a prompt payment claim is more challenging. To enforce the New Jersey Prompt Payment Act and recover interest penalties, a claimant must file a lawsuit against the non-paying party. It’s not all bad news, however! Whoever wins that suit will be awarded reasonable attorney fees and costs.
Lawsuits can be tricky and expensive, though. Plus, just like liens – no one wants to deal with a lawsuit. That’s why adding a step here can be really effective.
Enter another tool in your payment arsenal, a document that sends a credible warning of consequences should you continue to go unpaid: the Notice of Intent to Make Prompt Payment Claim.
Much like a Notice of Intent to Lien, sending a Notice of Intent to Make Prompt Payment Claim acts as a threat before having to drop the hammer. It states that, if payment isn’t made (and made soon), a lawsuit will be filed to recover under prompt payment laws.
Exercising this extra step can help to compel payment without ruining relationships and bottom lines. Plus, it’s far less expensive than a lawsuit and relatively risk-free. If it doesn’t work, a claimant can still go forward with a lawsuit.