Indiana Prompt Payment Guide and FAQs

Indiana law does not address prompt payment for private projects.

(a) Section 1 of this chapter does not apply to the following:

(1) Interagency or intergovernmental transactions.

(2) Amounts payable to employees or prospective employees of state agencies or political subdivisions as reimbursement for expenses.

(3) Claims subject to a good faith dispute, if before the date of timely payment notice of the dispute is:

(A) sent by certified mail;

(B) personally delivered; or

(C) sent in accordance with the procedure in the contract.

(4) Contracts entered into before September 1, 1983.

(5) Contracts related to highway or road construction, reconstruction, or maintenance, if:

(A) the Indiana department of transportation authorizes partial progress payments under IC 8-23-9-14; and

(B) each progress payment does not exceed five hundred dollars ($500).

(6) Claims, contracts, or projects that are to be paid for exclusively with federal funds.

(b) As used in subsection (a)(3), “good faith dispute” means:

(1) a contention by the state or political subdivision that goods delivered or services rendered were:

(A) of less quantity or quality than ordered or specified by contract;

(B) faulty; or

(C) installed improperly; or

(2) any other reason giving cause for the withholding of payment by the state or political subdivision until such dispute is settled.

(a) The auditor of state shall pay a late payment penalty on behalf of any state agency required to pay late payment penalties under this chapter. The auditor of state shall pay the penalties from funds designated for administrative costs of the agency receiving the public works, personal services, goods and services, equipment, or travel. The penalties may not be paid from other funds of the state.

(b) Any late payment penalty that remains unpaid at the end of any thirty (30) day period shall be added to the principal amount of the debt and, thereafter, penalties shall accrue on that amount.

(c) In instances where a claim is filled out incorrectly, or where there is any defect or impropriety in a claim submitted, the auditor of state, any division of the Indiana department of administration that accepts claims for payment, or a political subdivision, as appropriate, shall contact the vendor within ten (10) days. An error on the vendor’s claim, if corrected within five (5) business days of being so contacted, may not result in the vendor being paid late.

(a) This section applies to contractors receiving late payment penalties under section 1 of this chapter.

(b) A contractor who is unable to make timely payments  to a subcontractor because of a state agency or political subdivision’s failure to make timely payments to the contractor shall pay interest to the subcontractor at the rate of one percent (1%) per month on the amount due the subcontractor after the contractor receives payment and any penalty paid under this chapter.

(c) Any interest that remains unpaid to the subcontractor at the end of any thirty (30) day period shall be added to the principal amount of the debt. After that time, interest accrues on the aggregate of the principal and unpaid interest.

(a) The auditor of state shall prepare a list that:
(1) identifies each state agency that has paid, or on whose behalf the auditor of state has paid, a late payment penalty under this chapter; and
(2) states the sum paid by the agency or by the auditor of state on behalf of the agency during the preceding year.
(b) The auditor of state shall submit the list prepared under subsection (a) to:
(1) the governor; and
(2) the budget agency;

before August 1 of each year.

As used in this chapter:

“State agency” means the state of Indiana or any commission or agency created by law.

“Agent” shall include any board, commission, trustee, officer or agent which acts on behalf of a state agency.

“Public building”, “public work” and “public improvement” or combinations thereof shall be construed to include all buildings, work or improvements the cost of which is paid for from public funds but shall not include highways, roads, streets, alleys, bridges and appurtenant structures situated on streets, alleys, railroad projects (as defined in IC 8-5-15-1 ) and dedicated highway rights-of-way.

“Substantial completion” shall be construed to mean the date when the construction of a structure or building is sufficiently completed, in accordance with the plans and specifications, as modified by any completed change orders agreed to by the parties, so that the state agency can occupy the structure or building for the use for which it was intended. Furthermore, the warranty period shall commence no later than the date of substantial completion.

“Contractor” shall mean any person, firm, limited liability company, or corporation who is party to a contract with a state agency to construct, erect, alter or repair any public building or is any way involved in public work or public improvement.

“Subcontractor” shall mean and include any person, firm, limited liability company, or corporation who is a party to a contract with the contractor and who furnishes and performs on-site labor on any public building, work or improvement. It also shall include materialmen who supply contractors or subcontractors as contained in this chapter.

“Retainage” means any amount to be withheld from any payment to a contractor or subcontractor pursuant to the terms of a contract until the occurrence of a specified event.

“Escrowed principal” shall mean the value of all cash and securities or other property at the time placed in an escrow account.

“Escrowed income” shall mean the value of all property held in an escrow account over the escrowed principal in such account.

To the extent that this chapter is applicable, all contracts between a contractor and a state agency concerning any public building, work, or improvement entered into after May 1, 1972, and which contracts are in excess of two hundred thousand dollars ($200,000) are to be governed by the provisions of this chapter, as are the rights and duties among the parties to the contract and any subcontractors who do any work under the contract. A state agency may elect to have a contract that is for not more than two hundred thousand dollars ($200,000) be governed by this chapter. All contracts governed by the provisions of this chapter shall include provisions for the retainage of portions of payments by a state agency to contractors, by contractors to subcontractors, and for the payment of subcontractors.

Any state agency which enters into a contract for any public building, work or improvement, and any contractor subcontracting portions of such contract, which contracts contain provision for retainage shall include in their respective contracts a provision that at the time any retainage is withheld, the state agency and/or contractor shall place such retainage in an escrow account, with a bank, savings and loan institution, or the State of Indiana or an instrumentality thereof, as escrow agent selected by mutual agreement between the affected contract parties, pursuant to a written agreement among the bank or savings and loan institution, the state agency, and the contractor as appropriate. The escrow agreement shall provide as follows:

(a) The escrow agent shall promptly invest all escrowed principal in such obligations as shall be selected by the escrow agent in its discretion.

(b) The escrow agent shall hold the escrowed principal and income until receipt of notice from the state agency and the contractor, or the contractor and the subcontractor, specifying the portion or portions of the escrowed principal to be released from the escrow and the person or persons to whom such portion or portions are to be released. Upon receipt of such notice the escrow agent shall promptly remit the designated portion of escrowed principal and the same proportion of then escrowed income to such person or persons.

(c) The escrow agent shall be compensated for its services as the parties may agree on a commercially reasonable fee commensurate with fees then being charged for the handling of escrow accounts of like size and duration. The fee must be paid from the escrowed income of the escrow account.

(d) The agreement may include such other terms and conditions not inconsistent with the foregoing paragraphs (a), (b) and (c) including but not limited to provisions authorizing the escrow agent to commingle the escrowed funds with funds held pursuant to other escrow agreements and limiting the liability of the escrow agent.

The treasurer of state may charge a reasonable fee for services that the treasurer renders in connection with the establishment and administration of escrow accounts. If the treasurer charges such fee, the treasurer shall prepare a fee schedule and make it available to the contractor. Any fee must be paid by the contractor at the time the escrow account is established.

(a) To determine the amount of retainage to be withheld, a state agency shall elect one (1) of the following options:

(1) Withhold no more than ten percent (10%) nor less than six percent (6%) of the dollar value of all work satisfactorily completed until the public work is fifty percent (50%) complete, and nothing further after that.

(2) Withhold no more than five percent (5%) nor less than three percent (3%) of the dollar value of all work satisfactorily completed until the public work is substantially complete.

(b) If upon substantial completion of the work there are any remaining uncompleted minor items, an amount computed under section 6 of this chapter shall be withheld until those items are completed.

(a) This section does not apply to a contract entered into by a state educational institution if:

(1) the amount to be paid under the contract is less than five hundred thousand dollars ($500,000); and

(2) the state educational institution agrees to waive the requirement.

(b) At the time of entering into any contract covered by the provisions of this chapter, the contractor shall furnish a valid performance bond which is acceptable to the state agency involved in an amount equal to the contractor’s total contract price. If it is acceptable to the state agency involved, this performance bond may provide for incremental bonding in the form of multiple or chronological bonds which, when taken as a whole, equal the total contract price.

(c) The surety on the bond shall not be released for a period of one (1) year after final settlement with the contractor. No change, modification, omission or addition in and to the terms or conditions of said contract, plans, specifications, drawings or profile or any irregularity or defect in said contract or in the proceedings preliminary to the letting and awarding thereof shall in any way affect or operate to release or discharge the surety.

Within ten (10) days of the receipt of any payment by the state agency or escrow agent, the contractor or escrow agent shall pay all subcontractors with whom he has contracted their share of the payment the contractor received based upon the service performed by the subcontractor. The contractor shall furnish upon request a sworn statement or certification at the time of payment to him that the subcontractor has received his share of the previous payment to the contractor. The making of an incorrect certification may be considered a breach of contract by the state agency, and it may exercise all of its prerogatives set out in the contract in addition to the remedies for falsifying an affidavit. Such an action may also result in a suspension of prequalification with the certification board established under IC 4-13.6-3-3.

The contractor shall be paid in full including all escrowed principal and escrowed income by the state agency and escrow agent within sixty-one (61) days following the date of substantial completion, subject to IC 5-16-5. If at that time there are any remaining uncompleted minor items, an amount equal to two hundred percent (200%) of the value of each item as determined by the architect-engineer shall be withheld until said item or items are completed.

All suits must be brought against a surety on a bond required by this chapter within one (1) year after the completion of the work or service in question.

This chapter shall not be construed as conflicting with any other laws for the protection of labor, subcontractors or materialmen, but is supplemental thereto.