One of my clients called about a large subcontract her company was performing. Rita asked me whether there was a “prompt pay” statute in the project’s state. She was concerned that substantial delays in paying her company’s monthly progress billings, which were in the hundreds of thousands of dollars, would put it under a serious financial burden. The general contractor had already been slow in making progress payments.

Rita had read about prompt pay laws and understood them to require general contractors to pay their subs within a fixed period after they had been paid. Rita was correct, in a very general sense. Each state has a different version of these payment laws. In some, the state’s prompt pay law only applies to government contracts. (Whether a public-private partnership, often called 3P or PPP, should be treated as a government job for prompt pay purposes has yet to be decided.)

What exactly are these prompt pay laws, and how helpful are they?

An issue of fairness

For many state legislators, it just doesn’t seem right that a contractor can be paid for work properly done by its subs and not pass on that payment. Federal government contracts have some protection for subcontractors. Once a prime contractor has received a progress payment from the government, it has 7 days to pay its subs. Late payment carries an interest penalty.

In Pennsylvania, private and public jobs are covered by its prompt pay act, with different rules for each. On private jobs, the owner must pay the prime contractor within 20 days of invoice, and the prime then has 14 days to pay its subs. Late payment carries a 1% per month interest penalty. Different time frames apply for final payments.

Some prompt pay acts give added powers to an unpaid contractor. Pennsylvania and Tennessee allow the unpaid subcontractor to suspend performance. Texas allows for suspension, too, but also allows a sub to not proceed with additional (extra) work if a formal change order has not been issued.

There is no general rule

The internet has multistate summaries of prompt pay laws, but use caution when relying on them. There are major differences in these laws state by state, and states modify them on an irregular basis. You need to read the most up-to-date version of the statute, and you cannot be sure that is reflected in the internet’s multistate summaries.

New York, for example, put a cap of 5% on an owner’s retention as of November 2023 and allowed final payment to be invoiced at “substantial completion,” where previously the last invoice had to await “final approval.” 

Virginia’s prompt pay law was amended effective January 2023 on issues of owner and general contractor withholdings for nonperformance by a sub, and it rendered “pay if paid” clauses invalid on state government jobs.

Other more powerful laws that protect subcontractors

About one-third of the states have enacted a “trust fund” statute that is tied to lien laws. Other states, such as California, have interpreted existing law to create a trust fund (e.g., Calif. Bus. & Prof. Code §7108).

The trust fund statute in Maryland is fairly typical, providing that monies paid to a general contractor for work done by a subcontractor “shall be held in trust” by the general contractor. In Michigan and Colorado, violations of these statutes can lead to personal liability of the company official who “breached the trust” by not paying the amounts due to the subcontractor. Wisconsin’s law, like some in other states, makes misuse of trust funds a crime.

Trust fund laws can be more powerful in inducing the general contractor to pay its subs than prompt pay laws that only carry the threat of an interest penalty. A breach of trust action can expose the nonpaying GC to attorney’s fees and other penalties under traditional “trust fund” concepts.

It is often the case that the general contractor is not paying its subs because of its own financial problems. A threat of having to pay interest for violation of a prompt pay law may not be a sufficiently worrisome concern to a general contractor in financial trouble. However, the potential for a lawsuit in fraud—or worse, a criminal indictment—can be a much more compelling reason for the general to pay the subcontractor.

How did I help Rita?

Instead of sending Rita a long memo on the shortcomings and benefits of prompt pay laws, I sent her a copy of the trust fund statute for the state where her project was located, along with an article I had written about trust fund law. I told her to send the statute and the article to the general contractor. Once the general contractor understood the legal consequences of not paying its sub on time, slow payment was no longer a problem.

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