There are plenty of problems with construction payment, and many solutions have been attempted through legislation. But more legislation isn’t the answer. While it’s not the answer, legislative changes can help fix the problems, when done right. Enter Little Miller Acts. Every state provides payment protection on public projects via their own version of a Little Miller act – but the protection is limited to down-the-chain parties. The idea is that since the GC has been hired by the public, surely they won’t get stiffed by the government. But that’s not always the case.
Public Agencies Slow-Pay Contractors, Too.
Now, it’s not like GC’s are completely unprotected. Most jurisdictions have Prompt Payment and Retainage laws that keep the money moving. When payment isn’t made to the GC on time, the public authority typically faces some form of interest penalty. Lower tiered parties are entitled to bond claim rights in the event of nonpayment. However, because the GC is the one who secures payment bonding for the project, if the GC goes unpaid, they’re unable to file a bond claim for recovery. So what happens when there’s a standoff?
A Current Example
This isn’t just a hypothetical issue – it can be a real problem. Take the Orange County Government Center (in New York), for example. On a massive, $74M project, the County is withholding $1.8M in final payments five months after the project’s completion. That might sound like fractional amount at first. Once you consider how slim the profit margins are in this industry, you realize – that could be a huge chunk of the profit margin for this job.
Anyway, the county is withholding payment. According to them, the GC still hadn’t collected all lien waivers. Every GC can understand this headache – rounding up waivers can be a nightmare. However, in this instance, that’s not the real issue. No, according to the GC, all waivers have been collected and accounted for.
Instead, it appears, the county is withholding payment due to its own mistake. By several accounts, payment is being withheld because the floor gets slippery in the winter. The floor made of material specifically chosen by the county. They’re hoping the contractor will save them from themselves and re-do the work. Now, that contractor is having to hire an attorney (and probably an expensive one) to force the release of the $1.8M retained.
I think the contractor says it best with this quote: “Shame on the County and all those involved in holding up payment.”
Struggling to Manage Lien Waivers? Here are 4 Tips
What Can They Do?
Well, they could always make a claim under the state’s prompt payment laws. Or they could make a retainage claim (or at least threaten one). Luckily, New York is a state where these laws afford a contractor pretty significant protection. You can learn more about them at our Prompt Payment FAQ or Retainage FAQ, but interest penalties can be applied to payments not released on time.
Holding Payments Hostage isn’t “Just Business.” It’s Criminal.
OK. Criminal is a little strong here. But holding payments hostage might be against a few laws, depending on how and where it’s done. But the construction industry is fraught with risk already. Prompt payment laws regularly allow for subs and suppliers to be paid 30, 40, even 50 days after the GC receives payment. When that GC isn’t even getting paid, and when it’s at the hands of a public agency, it just goes to show that no one is safe from risk in construction payment. That is, no one is safe until transparency and communication are prioritized.
Changing industry ideals is the best way to bring fairness to construction payment. While lien laws, prompt payment laws, and other regulations are impactful, they all become more or less irrelevant when everyone is committed to fairness.