Prompt Payment
Guide & FAQs

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What do I need to know about Prompt Payment?

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Prompt Payment FAQs

Almost every state (and country) has prompt payment rules, laws, and procedures. It can be really expensive to not follow these requirements. Learn everything you need to know about prompt payment with this guide and FAQs.


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Map of Prompt Payment Requirements

Prompt payment rules are different depending on where your job is located. Use our color-coded map to learn more about retainage requirements that may affect your next job.

Prompt payment can refer to a number of different things:

  1. The federal Prompt Pay Act
  2. An individual state’s prompt payment law
  3. A prompt payment claim made by a party on a construction project

Prompt payment requirements are rules, codified into federal and state laws, that govern the time period in which payment must be made to contractors and subcontractors in order to ensure that payment is made in a timely fashion. Prompt payment requirements are another form of payment protection built into the law to benefit construction industry participants, but is often overlooked.

Rather than provide security for payment in general, prompt payment requirements are rules aimed squarely at cash-flow and working capital. By specifying the time in which payments must be made all throughout the payment chain, and defining and limiting the situations in which payment is allowed to be withheld past those general deadlines, prompt payment requirements seek to shorten time-to-payment for contractors, subcontractors, and suppliers, and provide a framework for the timing of construction payments that is reasonable and beneficial to those performing work. Generally speaking, these timeframes are short (i.e. 7-14 days), and they usually begin to count from when the party responsible for paying has received their own payment.

As evidenced by the general time-to-payment for construction participants, though, in practice, prompt payment rules may not always work as desired, or can leave too much wiggle room to be truly effective in speeding up payment. For example, in some situations, prompt pay statutes start the clock on when payment must be made from receipt of a “proper” and/or “undisputed” invoice or request for payment. And, it’s easy to see how issues could arise with either. Additionally, just like with many other construction payment-related laws, prompt payment requirements change from state to state, and by project type.

The federal Prompt Pay Act requires federal construction contracts to include a clause obligating the prime contractor to pay subcontractors for “satisfactory” performance within seven days of receiving payment from the government. The timing for payment on projects other than federal projects vary from state to state and by project type.

In 2011-2012, the Obama Administration provided supplemental guidance regarding the payment of subcontractors vis-a-vis the Prompt Pay Act. This originally provided that the government should pay small business contractors within 15 days of receiving a proper invoice. This was subsequently expanded to cover payments to subcontractors by requesting agencies “accelerate payments to all prime contractors, in order to allow them to provide prompt payments to small business subcontractors.”

Additionally, the majority of states also have their own prompt pay requirements. (More information on state-level prompt payment below.)

Frequently Asked Questions about Prompt Payment

Prompt payment is incredibly important, but what is meant by "prompt payment" is not exactly clear. And the rules are confusing. And even when the rules are known, because of cultural elements and industry relationships, it's hard to actually fully leverage these laws. Nevertheless, finding yourself on the wrong side of prompt payment requirements can be expensive for your business. These are frequently asked questions to help you better understand and navigate the prompt payment requirements that apply to you.

Do I need to know about Prompt Payment requirements?

Prompt payment requirements are nearly universal in applicability to construction projects, and accordingly, all construction participants should be aware of them, and be sure to appropriately follow the timing provisions when required.

Further, prompt payment requirements should be understood by both those making payment (to comply with the requirements) and by those receiving payment (to understand the payment timing to which they are entitled). Since so many construction participants both make and receive payments, this is often important for the same party from both sides.

With respect to the receipt of payment, it’s important to understand the prompt payment regulations because it impacts when payment for a project is entitled to be received. This can influence how the receiving party makes cash flow projections, as well as when the company may contemplate an escalation of debt collection efforts.

For those making payment, the prompt payment laws are important because they can result in stiff consequences if they are overlooked. In many cases, failure to follow the prompt payment timelines can result in liability for attorneys’ fees, the addition of mandated interest amounts, and even penalties in the form of a percentage increase of the past due amount.

Do Prompt Payment laws vary by project location?

Yes. While the federal Prompt Payment Act applies to any federal construction project located in any state, the majority of states also have their own version of the prompt payment laws.

Like many other aspects of the law surrounding construction payment, the rules related to prompt payment requirements can change from state to state. In the event the project is either private or a state/municipal project, the specific prompt payment requirements that may apply depend on the state in which the project was located.

Do Prompt Payment Requirements change according to the project type?

Yes. Like the requirements changing due to project location, above, the rules related to prompt payment requirements can change also based on project type.

If the project is a federal project, the federal Prompt Pay Act will apply. Otherwise, the applicability of prompt payment laws and the specific prompt payment requirements (in the event prompt payment laws are applicable) depend not only on the state in which the project was located, but also on whether the project is private or a public works project.

In what circumstances are Prompt Payment Requirements normally applicable?

Prompt payment requirements are generally applicable throughout the gamut of construction projects. However, the most common type of construction project in which there are no applicable prompt payment requirements is a private (residential/commercial) project. While many states have enacted prompt payment legislation with respect to private works of improvement, it is not as universal as the applicability of prompt payment rules to public works projects (or federal projects).

What happens if I make a mistake with Prompt Payment Requirements?

Making a mistake with respect to the prompt payment requirements applicable to a specific project can result in significant consequences. With respect to parties receiving payment, not knowing the prompt payment requirements and not following-up with customers with respect to these requirements can mean waiting longer than needed for payment, strangling cash-flow and working capital, and missing out on the potentially applicable interest or penalties for late payment.

With respect to parties making payment, making a mistake with respect to prompt payment requirements can result in significant consequences. In many cases, failure to follow the prompt payment timelines can result in liability for attorneys’ fees, the addition of mandated interest amounts, and even penalties in the form of a percentage increase of the past due amount. In some situations these penalties can be significant (up to 15% of the late payment).

Are Prompt Payment Requirements usually paired with anything else?

Prompt payment requirements are one of many construction-payment-related laws. All of these rules, requirements, and other regulations work to protect payment for construction industry participants, with some more closely related than others.

While there is no specific additional document or rule with which prompt payment provisions must be paired, prompt payment can often come into play with both questions or issues with respect to retainage, and the drafting of construction contracts themselves (as sometime the prompt payment requirements may be modified by contract).

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