by David E. Wilson
David Wilson
The Prompt Pay Act of 2010 has improved the flow of funds to those who furnish and pay for the labor and materials in private construction. It contains important provisions affecting progress payments, change orders, “pay-if paid”, disputes, and suspension of work. The law applies to prime contractors, subcontractors and suppliers entitled to file a mechanic’s lien on projects where the prime contract has an original price of $3,million or more. It does not apply to residential projects of four or fewer units, or where the prime contract was entered into before November 8, 2010.
Here’s how the Prompt Pay Act works:
Payment applications contracts and subcontracts must provide reasonable time periods within which periodic payment applications are submitted, approved or rejected, and paid. The parties may negotiate those time periods provided they’re reasonable and don’t exceed the prescribed limits. The reasonable time period for submission of an application may not exceed 30 days.
The cycle begins with the end of the first calendar month occurring at least 14 days after the applicant’s commencement of work. Payments are based on actual progress, although milestones may still be a basis for payment if the time between applications doesn’t exceed 30 days.
Once submitted, the reasonable time period for approval or rejection may not exceed 15 days. But since the prime contractor must receive, review, and assemble applications from its subcontractors for inclusion in its own submission, the law allows the prime contractor an additional seven days to approve or reject a subcontractor’s application.
Likewise, the law allows each tier below the prime contractor seven days more than the tier above for approval or rejection of an application from the tier below. The grounds for rejection are not prescribed by the law and remain subject to the parties’ contract. However, any rejection, whether in whole or in part, must be in writing, explain the factual and contractual basis for the rejection, and be certified as made in good faith.
An application for payment that’s neither approved nor rejected within the specified time is “deemed” approved. To account for possible oversight or error, an application that was “deemed” approved may still be rejected up until the time payment is due, but the rejection must otherwise meet the statutory requirements for rejection. Meanwhile, a “deemed” approved application advances in line toward payment.
Finally, regardless of whether approval was express or “deemed, the reasonable time period for payment of an application may not exceed 45 days after approval.
Change Orders
The law also requires contracts and subcontracts to provide reasonable time periods within which written requests for change orders are approved or rejected. The time period for approval or rejection of change orders may not exceed 30 days after submission of the request, or commencement of the changed work, whichever is later.
The prime contractor, and each lower tier, is allowed 7 days longer than the tier above for approval or rejection of a change order request from the tier below. Requirements for submission and entitlement remain a matter of contract. Rejection may be in whole or in part, but it must be in writing, explain the factual and contractual basis for rejection, and be certified as made in good faith.
If a change order request is neither approved nor rejected within the specified time, it’s likewise “deemed” approved, unless properly rejected before payment is due. And once approved, whether expressly or “deemed”, the change order request may be submitted for payment with the next application for payment.
The second part of this article addressing “Pay-if-Paid,” disputes, and suspension of work will appear in next month’s edition of high profile.
Attorney David E. Wilson is a Partner at the construction law firm of Corwin & Corwin LLP, and drafted the bill that became the Prompt Pay Act.
