Construction Contract Act
Construction contractors need to get work done on schedule, yet cash flow can stop when the owners' payments are delayed. Private construction contract acts are a solution. As of 2009, a minority of states have passed these laws that prevent owners from using agreed rules to pay late or avoid payment. A state's Construction Contract Act makes it a firm requirement to pay contractors for their work within a short time period.
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Preventing Payment Failures
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Construction contracts do not always require the owners pay on time. Agreements that foster poor payment schemes being common, states have enacted laws to protect the finances for contractors, subcontractors and materials workers and design workers. Firm rules prohibit a failure of prompt payment.
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State Protections
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Not all citizens in the United States have strong protection. A minority of states have specific statutory rules for prompt payment. New York's Construction Contracts Act and Kansas' Fairness in Private Construction Act are strong laws that curtail slow payment, waiting until paid and retaining payment funds. The laws exclude single home construction and small residential projects.
Prompt Payment
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In private construction, the owners failure to make prompt payment can constrict the cash flow for the entire project. Prompt payment laws in the construction contract acts ensure that each contractor and construction professional in the payment chain gets paid on time. Owners are required to pay the prime contractor within a set time, typically 30 days. Arizona requires payment within the short time of seven days from the invoice approval; Illinois gives 40 days. After payment to the contractor, most prompt payment laws require seven days or 15 days for the contractor to pay a subcontractor. The subcontractor then has the same amount of time to pay a lower contractor or professional. Connecticut, a lenient state, gives 30 days to both the contractor and subcontractor.
An owner or contractor pays stiff interest penalties for late payment. Kansas levies a stern penalty at 18 percent annual interest on late payments; Illinois has a much lower 10 percent interest penalty. New York and New Mexico choose a 1 percent and 1.5 percent monthly interest penalty.
Contingent Payment
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The most expedient excuse for not paying is the owner has not been paid yet. By agreeing to be paid after the owner is paid, a contractor takes on the risk of payment delays. The contractor also makes these agreements with subcontractors, passing on the risk. In Kansas, an owner is not allowed to use a "pay if paid" contract agreement to evade a mechanic's charge on the owner's property for the late payment. If a subcontractor demands payment in Oklahoma, the contractor has 10 days to pay, and can not use a "pay when paid" agreement to avoid payment.
Retainage
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Some owners hold back funds until late in the project. New York allows owners to hold back reasonable amounts. Retainage limit laws limit the amount held back to a percentage of cost paid. Ohio limits retainage to 8 percent and requires an owner pay out retainage after the project is 50 percent done. Montana keeps held back amounts low, at 5 percent. Kansas allows 10 percent retainage until the final payment. The Kansas law also keeps owners from using retainage as a reason for slow payment.
References
- Photo Credit "Steel Worker Houston Texas 1" is Copyrighted by Flickr user: billjacobus1 (Bill Jacobus) under the Creative Commons Attribution license.
