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.
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:
- The federal Prompt Pay Act
- An individual state’s prompt payment law
- 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. The best practice is to reference these prompt payment laws early and often. For example, if sending any demand letters for payment, then you’ll want to include a reference to prompt payment rules because they may entitle you to recover costs, interest, attorney fees, and penalties!
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.)