Prompt payment laws have been enacted across the country to ensure construction companies get paid what they’ve earned in a timely fashion. Currently, the State of Michigan only regulates payment timing on public works projects. However, House Bill 6174 was recently introduced into the Michigan Legislature, and it would bring prompt payment rules to the private sector as well. Here’s everything that Michigan contractors should know about this newly proposed private prompt payment legislation.
Construction Payment Act introduced into the MI House of Representatives
In June of 2022, House Bill 6174 was introduced, slated to bring private construction projects under the protection of prompt payment laws. The stated purpose of this bill is to “promote the prompt payment for labor, materials, and services provided for the improvement of real property in the private contractual construction industry, to provide for certain contract provisions, and to provide for certain remedies and penalties.”
Let’s take a closer look at what this would entail if enacted.
- Title: HB-6174 Construction: contracts; prompt payment law; establish for contractors to pay subcontractors and suppliers in a timely manner.
- June 9, 2022
Proposed private prompt payment laws
These new prompt payment provisions would only apply to private, commercial projects. The Act explicitly excludes public works projects, and residential projects.
As far as residential projects are concerned, specifically: “[r]esidential contracts for the erection, alteration, or repair of any single residential dwelling, attached multiple residential dwellings less than 7 units, detached condominiums, site condominiums, or premises used or intended to be used for residency purposes and related facilities appurtenant to the premises, used or intended to be used as an adjunct or residential occupancy.”
Regarding when invoices should be submitted by the general contractor: If the contract is silent on the invoice schedule, the contractor is entitled to submit an invoice to the owner every 30 days for payment of work performed, or a final invoice when the agreed-upon work is fully completed. Once submitted, payments from the owner must pay any undisputed amounts within 30 days of receipt of an invoice, or 30 days after the end of the billing cycle — whichever is later.
As far as what constitutes a “billing cycle,” this will be determined by the terms of the contract. However, if the contract is also silent on this issue, then the default billing cycle is one calendar month.
All other payments down the contracting chain to subcontractors, sub-subcontractors, and suppliers must be made within seven days of receipt of payment from the higher-tiered party.
Withholding payment procedures
An owner or contractor may withhold payments if the work is unsatisfactory, incomplete, or there is a dispute over the scope of work. If a party does decide to withhold payment, a written or electronic notice of withholding that specifically describes in detail, the items within the invoice that are disputed within 10 days of receipt of said invoice.
If the written notice isn’t provided within the 10-day period, the invoice will be considered approved, however that doesn’t necessarily mean that the work has been accepted. Furthermore, if the dispute isn’t resolved within 30 days after the notice of withholding, the party must deposit the disputed amounts in an interest-bearing account until either the dispute is resolved or a court/arbitrator order is issued.
Penalties for late payment
Wrongfully withheld or late payments will accrue interest at a rate of 12% per year (1% per month), compounded monthly. Also, if a court or arbiter finds that the amounts were withheld in bad faith, the claimant may be awarded reasonable costs associated with the action and attorney’s fees.
Contract provisions deemed void & against public policy
Lastly, there are certain contractual provisions under this proposed Act that would be declared void and unenforceable as a matter of public policy.
These include any requirement that:
- A contractor assumes the risk of nonpayment of the owner
- A contractor waives any statutory or other right to commence litigation or arbitration until payment is made to the general or prime contractor
- Make subject to payment by the owner, the obligation of a contractor and its surety under any payment or performance bond, or to make any payment to a claimant under that bond
- A contractor relies on the credit of the owner and not on the credit of the general or prime contractor or of a bonding company
- A dispute or claim arising from a construction project located in this state between the contractor, subcontractor, or supplier be governed or subject to the laws of a state other than this state or require litigation, arbitration, mediation, or other dispute resolution processes to occur in a state other than this state
- A contractor waives any provisions provided by this act
Currently, 35 states have prompt payment laws regulating payments on private projects in some form or another — 36 when Virginia’s private prompt payment laws go into effect in 2023. The introduction of this bill should be welcome news to contractors, subs, and suppliers in Michigan, as steady and consistent cash flow is crucial to construction business’ success.
However, it’s important to keep in mind that this bill is still in its preliminary stages, and there’s no telling if this bill will pass, or exactly what it will look like if/when it does. Private contractors in Michigan should monitor the progress of this bill to ensure they are ready to comply with any changes when necessary — and we will be as well.