If an owner or general contractor fails to timely pay on a project, you may be entitled to prompt pay interest. Prompt payment acts are intended to deter late payments by general contractors and owners by enabling contractors and suppliers to pursue additional remedies including penalty interest, attorneys' fees and suspension of performance.
Texas Private Prompt Payment Act
Chapter 28 of the Texas Property Code, commonly known as the Prompt Payment Act, requires the owner of a private project to pay the general contractor within 35 days of an invoice being submitted. The general contractor, in turn, must pay subcontractors within 7 days of receiving payment from the owner. The same deadline is imposed on first-tier subcontractors making payments to second-tier subcontractors.
If the parties have a good faith dispute over the work, such as whether the work was done in a proper manner, the party withholding payment can withhold no more than 100 percent (non-residential) or 110 percent (residential) of the difference between the amounts each party believes is due. Interest accrues at the rate of 1.5 percent per month or 18 percent annually on overdue payments. The terms of the act cannot be waived or altered by contract. Any provisions that attempt to do so are void.
But, not all work falls within the private act. The payments must be in connection with a "contract to improve real property." While most construction work falls under this definition, you should take care to ensure your contractual scope of work falls definitions of Chapter 28 to ensure protection under the act.
Texas Public Prompt Payment Act
The public act, Chapter 2251 of the Texas Government Code, has very similar terms to the private act. The project owner must pay the general contractor no later than 31 days after receiving payment from the government, and the general contractor must pay subcontractors no later than 10 days after it receives payment from the owner. The same 10-day deadline is imposed on first-tier subcontractors making payments to second-tier subcontractors. A payment begins to accrue interest on the day after payment is due, at the monthly rate of 1% plus the prime rate (as published in the Wall Street Journal).
Like the private act, payments for work subject to a bona fide dispute can be withheld, and the terms of the public act cannot be waived or altered by contract and attempts to do so are void.
Right to Suspend Work
Under both the private and public prompt pay acts in Texas, general contractors and subcontractors now have a right to stop work if an owner or upstream contractor fails to pay an undisputed amount. For private contracts entered into on or after September 1, 2023, general contractors and subcontractors have a statutory right to refuse to perform owner-directed additional work on public and private projects if: (1) the downstream party does not have a written and fully executed change order for that additional work and (2) the aggregate value of all unexecuted change orders for owner-directed additional work exceeds 10% of the downstream party's original contract (or subcontract) amount. If a general contractor or subcontractor elects not to proceed with the additional work on this basis, it would not be liable for damages associated with the decision not to proceed. This new law will have a direct impact on schedule management and will incentivize a quicker change order process.
Federal Prompt Payment Act
The federal act, as a part of the Federal Acquisition Regulation ("FAR"), requires each construction contract awarded by a federal agency to include a clause that requires the prime contractor to include in each subcontract for labor or materials: (1) a payment clause which obligates the prime contractor to pay the subcontractor for satisfactory performance under its subcontract within 7 days out of such amounts as are paid to the prime contractor by the agency under such contract and (2) an interest penalty clause which obligates the prime contractor to pay to the subcontractor an interest penalty using an interest rate established by the United States Treasury.
Under the federal act, the government must pay the prime contractor no later than 14 days after receipt of a progress invoice. The government's final payment, including retainage, must be paid within 30 days after receipt of the final invoice. Upon receipt of payment, the prime contractor has 7 days to pay their direct subcontractors and suppliers. Each subcontractor and supplier has the same 7 day deadline to pay their lower tier subcontractors and suppliers, if any. These prompt payments are required if the subcontractor or supplier has been providing "satisfactory performance." If a party plans to withhold payment due to unsatisfactory performance, it must provide notice within 7 days of receiving the invoice.
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.
