United States: Statutory Right To Prompt Payment - Or Maybe Not

Last Updated: September 4 2017
Article by Daniel Douglass

A recent court decision in Georgia illustrates how laws enacted by many states to ensure prompt payment in the construction industry don't always achieve their purpose. These "prompt payment" statutes typically require an owner to pay a contractor (and a contractor to pay a subcontractor) within a certain number of days and award interest on untimely payments. These laws can provide important benefits to contractors and subcontractors, but are often subordinate to contract terms and therefore less helpful than they might appear.

Georgia's "prompt payment" law provides that an owner must pay a contractor within 15 days of receipt of a pay request, and the contractor must pay its subcontractor within 10 days of receipt of payment from the owner. (OCGA § 13-11-4). However, the contractor must have "performed in accordance with the provisions of [its] contract", and the subcontractor must have satisfied "the subcontract conditions precedent to payment." Already we are chipping away at the prompt payment requirement. And the very next section of the law says an owner (or contractor) can withhold payment for a list of reasons, including unsatisfactory job progress and defective construction. (OCGA § 13-11-5).

What about interest on untimely payments? The Georgia statute says late payments accrue interest at 1% per month (12% per annum). (OCGA § 13-11-7). Not only that, if you have to sue for payment and you prevail, you can recover reasonable attorneys' fees. (OCGA § 13-11-8). However, you can't recover interest unless you give notice of the statute at the time of your pay request, and you waive any interest claim if you accept payment. And the statute says the parties can agree to different interest rates, payment periods or other contract terms. In other words, you can contract away the benefits of the statute.

These limitations in the law were illustrated in a recent Georgia court decision. City of Atlanta v. Hogan Constr. Group, LLC, 341 Ga. App. 620 (2017). In that case, the Court found that the parties' contract addressed when payments would be made and what interest would accrue on late payments. The payment time was stretched out to 60 days, and the interest rate was reduced to the prime rate. The Court concluded, based on the language of the statute, that the contract terms controlled and the more stringent statutory requirements did not apply. Thus, the prompt payment law was not much help to the contractor.

Kentucky also has limitations in its prompt payment law. The Kentucky Fairness in Construction Act (KRS § 371.405) addresses prompt payment on construction contracts. It provides that an owner must pay amounts due the contractor within 30 business days after receipt of an undisputed pay request, and unpaid amounts accrue interest at 12% per annum (if the contractor sends the required notice by certified mail). It also provides that a contractor must pay "undisputed amounts" in its subcontractor's undisputed pay request within 15 business days of receipt of payment from the owner, and unpaid amounts accrue interest at 12% per annum. Obviously, the language allows for nonpayment based on disputed claims.  This was illustrated in a recent Kentucky court decision. D&D Underground Utilities Inc. v. Walter Martin Excavating Inc., 2015 U.S. Dist. LEXIS 59666 (E.D. Ky. May 7, 2015). The Court confirmed that if there is a "good faith" basis to dispute a claimed amount, then it does not have to be paid within the time limits under the statute.

Other states take slightly different approaches. Florida has prompt payment statutes setting the time of payment and interest rate for public projects (Fla. Stat. §§ 255.071, 255.073, 255.074), as well as a prompt payment law for private construction projects. (Fla. Stat. § 715.12). The latter requires an owner to pay its contractor within 14 days of the date due, and requires the contractor to pay its subcontractors within 14 days of the due date if payment has been received from the owner. A payment that is due and unpaid accrues interest at either the statutory rate (Fla. Stat. § 55.03) or the rate provided in the contract, whichever is greater. In other words, the statutory rate may trump the contractually agreed interest rate.

South Carolina's prompt payment law requires an owner to pay its contractor within 21 days of receipt of a pay request, and requires the contractor to pay its subcontractor within seven days of receipt of payment from the owner. (SC Code Ann. § 29-6-30). It also provides for interest at 1% per month on late payments. (SC Code Ann. § 29-6-50). However, like Georgia's law, the contractor must have performed in accordance with its contract, and the parties can agree to different pay periods and interest rates.

North Carolina has statutes addressing time of payment and interest on public projects (NC Gen. Stat. § 143-134.1), as well as private construction projects (NC Gen. Stat. §§ 22C-3, 22C-5). On private jobs, a contractor must pay subcontractors within seven days of receipt of payment for their work, with late payments bearing interest at 1% per month. However, like Georgia, North Carolina allows a contractor to withhold payment for a list of reasons such as delay or defective work. (NC Gen. Stat. § 22C-4). Virginia has statutes addressing payment and interest on public projects (VA Code Ann. §§ 2.2-4350, 2.2-4354), but not for private construction projects. Tennessee does not have such prompt payment statutes.

The bottom line is that many states have laws requiring prompt payment on construction projects. However, the benefit to contractors and subcontractors will vary depending on the state where the work is being done, and may be limited by the terms of their contract.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Daniel Douglass
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