Changes in Prompt Payment Penalties Catch Attention of Construction Industry

March 2011
Construction Law

Prompt payment penalties—long an important tool for contractors and subcontractors—are getting new attention in the construction industry. Whether it’s public or private projects, the economic downturn has led to increased prompt-payment litigation. And when more cases on a particular topic are heard by the courts, rules evolve. Here are some lessons learned from recent cases:

Lesson # 1.  Contractors and Subcontractors: Pay attention to extra work claims. If a contractor has a “bona fide dispute” with a subcontractor for extra work claims after a public project has been completed, the dispute over extra work entitles the contractor to withhold retention for work completed under the original scope of the contract. This means that subcontractors could be risking prompt-payment of retention for work performed where they assert disputed extra work claims.

Lesson # 2.  Understand when and how subcontract provisions can effectively waive the requirement that contractors pay progress payments to their subcontractors within 10 days. Contractors and subcontractors can contract around Business and Professions Code 7108.5’s prompt payment penalties. This means that contractors and subcontractors will likely start seeing subcontracts containing provisions relating to this section and its application on particular projects.

Lesson # 3.  Milestone based payment provisions can change prompt payment rules. Where a contract provides for payments based on accomplishments of milestones, prompt payment penalties under Civil Code sections 3260 and 3260.1 might not be available. Recent cases have held that milestone-based payments (e.g. where two 50% payments are contemplated) do not create a classic progress-payment/retention model, and thus sections 3260 and 3260.1 do not apply.

Conclusion

What do all these lessons mean for the construction industry? It means that California Courts are taking a very strict and narrow view of prompt payment statutes. As a result, contractors and subcontractors that seek to avail themselves to the benefits of prompt payment penalties should give careful consideration to the type of payment provisions they use in their contracts. Additionally, careful consideration should also be given to how a contract’s payment provisions are labeled. If milestone based payment provisions are utilized, contractors and subcontractors may still be able to obtain the benefits of prompt payment penalties if their contracts properly label and specify the purpose of each respective milestone payment.


© 2011 All rights reserved. Please note that the information contained herein is not intended to provide specific legal advice. You should consult with an attorney and not rely on any information contained herein regarding your specific situation.

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