The Virginia 2022 Legislative Session recently adjourned, and any proposed legislation that made it out of the State Legislature has been passed on to the Governor’s office for approval. One bill of particular importance for Virginia contractors is VA Senate Bill 550. If enacted, this new law would officially prohibit pay-if-paid clauses in both public and private construction contracts. It would also set prompt payment deadlines for private construction projects.
Here’s what you need to know about VA SB550.
Contingent payment clauses may become unenforceable in Virginia
Bill overview
- Title: SB 550: Contracts; payment clauses to be included, right to payment of subcontractors
- Introduced: January 12, 2022
- Effective date, if passed: July 1, 2022
- Sponsor: Senator John Bell
If enacted, this legislation would add new sections under Va. Code § 2.2-4354 and Va. Code §11-4.6 regarding payment clauses in construction contracts in general, as well as the timing of payment on private projects. The most relevant portions of these proposed changes are reproduced below.
§2.2-4352: Payment clauses to be included in contracts
“Any contract awarded by a state agency, or any contract awarded by any agency of local government in accordance with §2.2-4352, shall include
1. … Payment by the party contracting with the contractor shall not be a condition precedent to payment to any lower-tier subcontractor, regardless of that contractor receiving payment for amounts owed to that contractor. Any provision in a contract contrary to this section shall be enforceable.”
§11-4.6: Liability of contractor for wages of subcontractor’s employees
“B. In any construction contract between an owner and a general contractor, the parties shall include a provision that requires the owner to pay such general contractor within 45 days of the receipt of an invoice following satisfactory completion of the portion of the work for which the general contractor has invoiced…
C. Any contract in which there is at least one general contractor and one subcontractor shall be deemed to include a provision… which shall require such higher-tier contractor to pay such lower-tier subcontractor within the earlier of (i) 45 days of the satisfactory completion of the portion of the work for which the subcontractor has invoiced or (ii) seven days after receipt of amounts paid by the owner to the general contractor or by the higher-tier contractor to the lower-tier contractor for work performed by a subcontractor pursuant to the terms of the contract…
… Payment by the party contracting with the contractor shall not be a condition precedent to payment to any lower-tier subcontractor, regardless of that contractor receiving payment for amounts owed to that contractor… Any provision in a contract contrary to this section shall be unenforceable. Failure of a contractor to make timely payment as provided in this subsection shall result in interest penalties consistent with §2.2-4355.”
VA SB550 at a glance
The most significant change that this bill would enact is the official prohibition of pay-if-paid clauses (aka contingent payment clauses) on both public and private construction projects. Such clauses shift the risk of nonpayment from the general contractor to the subcontractor. This means that if the contractor or higher-tiered subcontractor isn’t paid, then they have no obligation to pay their subs and/or suppliers.
These types of clauses can be devastating to lower-tiered subs and suppliers. Many states have already outlawed such clauses, and it appears Virginia will be joining the ranks. However, what this bill(if enacted) doesn’t address is whether it will affect current contracts and/or litigation.
Another important change under SB550 is the adoption of prompt payment laws for private projects in Virginia. The commonwealth currently has prompt payment laws on public projects, but if this bill passes, private projects will also be subject to statutory timing provisions. It would require owners to pay the GC within 45 days of receipt of an invoice. In turn, subcontractors must be paid within either 45 days from invoicing, or seven days from when the higher-tiered party receives payment — whichever is earlier.
The bill is currently on Governor Youngkin’s desk awaiting signature. We’ll be monitoring the progress of this bill and will provide any updates.