Earlier this year, legislation was introduced in Virginia to shore up payment protections in the construction industry. The proposed changes include an official prohibition on pay-if-paid clauses, along with new prompt payment requirements on private construction projects.
Here’s a full breakdown of everything Virginia contractors need to know to prepare for these changes in 2023.
New payment protections for Virginia contractors coming in 2023
Virginia Senate Bill 550 was passed along to Governor Youngkin’s office in March 2022. However, the Governor provided some recommendations to the bill and sent it back to the Legislature to review the proposed changes.
After review from both the VA House and Senate, the bill was reenrolled and eventually signed by the Governor on April 27, 2022. This bill not only establishes prompt payment rules on private projects in Virginia, but also purports to prohibit the enforceability of pay-if-paid clauses. These changes will go into effect on all new construction contracts entered into on or after January 1, 2023.
See our original coverage of this bill: VA SB-550: Virginia Proposed Ban on Pay-if-Paid Clauses in Construction
VA private projects finally afforded protection under prompt payment laws
The private prompt payment laws will be incorporated under Changes to Va. Code §11-4.6. The following is a breakdown of the timing requirements for payment and the process. However, a few ambiguities remain which could jeopardize the efficacy of these new changes.
Payments from the owner to the prime contractor
Let’s start at the top: Payments from the owner must be made to the prime contractor no later than 60 days after the owner receives an invoice after satisfactory completion of that portion of the work. Furthermore, the contract between the parties must include a provision to that effect. So, GCs should begin to review and update their contracts to be ready when these changes go into effect.
The owner may withhold payment for noncompliance with the terms of the contract. However, they must notify the contractor in writing. The notice should inform the contractor of their intent to withhold payment and describe the reason for nonpayment with reasonable specificity.
One remaining issue is timing. There is no specific timing mechanism required for such notices — they’re sent presumably before payment is due. But without a proper timeframe to serve these notices, this could lead to loopholes and gaps in the protection these new laws are meant for.
Payments from contractors to their subs and suppliers
All other payments down the contracting chain must be made to the sub or supplier within either 60 days of the contractor’s receipt of an invoice after satisfactory completion of that portion of the work, or seven days after the contractor receives payment from the higher-tiered party, whichever is earlier.
Additionally, a contractor may also decide to withhold payment for non-compliant work. This notice, however, must be a little more detailed than the notice required from owners. This notice must be in writing, specifically identify the contractual non-compliance, the dollar amount being withheld, and the lower-tiered subcontractor responsible for the contractual noncompliance.
Again, this section also doesn’t provide any specific timing mechanism for these notices, which could lead to the same issues discussed above.
Interest penalties for late payment
Lastly, the failure to make timely payments in accordance with these new prompt payment rules will result in interest penalties accruing at a rate equal to the prime rate, as reported in the Wall Street Journal. The interest begins to accrue on all amounts that remain unpaid after seven days from when the payment was due.
However, the interest rate isn’t always set in stone: The contract may provide for a different rate of interest, leaving the door open for some to provide an incredibly low interest rate, undermining the efficacy of these late payment penalties.
Prohibition on pay-if-paid clauses: Public vs. private projects
Prompt payment changes aside, the presumed prohibition on pay-if-paid clauses on both private and public projects is a huge win for the Virginia construction industry. Although, the applicability of this prohibition varies slightly depending on the project type. Let’s start with public projects.
For public projects, this change comes in the form of an amendment to Va. Code §2.2-4354 under the VA Public Procurement Act, and reads as follows:
“…Payment by the contractor shall not be a condition precedent to payment to any lower-tier sub, regardless of that contractor receiving payment for amounts owed to that contractor. Any provision in a contract contrary to this section shall be void.’
This seems like a pretty straightforward ban on pay-if-paid clauses on public projects. But note the different approach to the use of the same contingent payment clause on private construction projects.
On private projects, the language prohibiting pay-if-paid clauses can be found under Va. Code §11-4.6(c), which reads as follows:
“… 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, unless the party contracting with the contractor is insolvent or a debtor in bankruptcy as defined in § 50-73.79. Any provision in a contract contrary to this section shall be unenforceable.”
It essentially reads the same as the public project language, but with the addition of “unless the party contracting with the contractor is insolvent or a debtor in bankruptcy.”
This exception seems a bit counterintuitive. One of the primary rationales for the use of pay-if-paid clauses was for GCs to shift the risk of the owner’s insolvency to their subs, and this purpose seems to remain intact. By providing this exception, it appears that subs will be protected under the circumstances of owners withholding payments and/or disputes between the GC and the owner.
In other words, subs on private projects come 2023 should still keep an eye out for these clauses.
We reached out to Senator John Bell’s office, the primary sponsor of the bill, and here’s what they had to say:
“I am very happy that we were able to get SB550 passed and provide protections for subcontractors. Unfortunately, some bad operators have taken advantage of Virginia companies and this bill will provide badly needed protections. I thank all of the stakeholders from across Virginia who provided input and helped in developing and passing this important legislation.”
These new laws will go a long way in helping ensure contractors get paid what they’ve earned — and in a timely manner no less. However, as with most new legislation, there are some gaps and ambiguities that will need to be addressed either by the courts or the next Virginia legislative session.