(Part two of a two-part article series)
This article is a continuation of Monday’s article, and we will discuss in detail the new payment terms for all construction contracts in Virginia.
ARE “PAY-WHEN-PAID” CLAUSES OF THE PAST IN VIRGINIA? A LITTLE, SORTA, MAYBE.
Effective January 1, 2023, all construction contracts in Virginia will be subject to payment terms limiting a party’s right to pay only a lower level subcontractor upon receipt of payment from the owner or contractor. top level entrepreneur. Along with the amendments to the Virginia Prompt Payment Act, §2.2-4354 discussed in the first article, new amendments to Virginia’s “wage theft” law, Va. Code §11-4.6, specify new requirements for payment to lower level subcontractors for all projects, public or private in Virginia.
A. New payment obligation for landlords
For the first time by law, Virginia now requires the owner to pay the general contractor “within 60 days of receipt of an invoice after satisfactory completion of the portion of the work for which the general contractor invoiced “. Satisfactory completion is not defined and most contracts expressly provide that progress payment is not acceptance of the work, as approval and acceptance usually takes place upon final completion. If the owner is going to withhold payment, he must do so in writing and with a reasonable specification of the reasons for non-payment. This does not affect the right to withhold holdback on a project until final completion. Importantly, this 60-day payment requirement does not apply to public bodies, as they are excluded from the definition of “owner”.
The owner’s failure to make timely payment now exposes him to liability for interest payments under the Prompt Payment Act at 1% per month, unless otherwise specified in the contract. A smart homeowner will now include a nominal interest rate in their contracts to mitigate any impact arising from this new requirement.
B. Prompt payment on all construction projects? Somehow.
The new payment provisions of the Va. Code §11-4.6 then focus on payment requirements between contractors and subcontractors. The law specifically excludes people supplying materials only, so materials suppliers are unlikely to take advantage of its new payment terms. Any contract between a higher tier contractor and a lower tier contractor is now deemed to include a provision that the upper tier contractor is responsible to the lower tier contractor “for the satisfactory performance of the subcontractor’s duties in under the contract” and must make payment within the earliest of:
(i) 60 days after satisfactory completion of the part of the Work for which the Subcontractor has invoices, or
(ii) Seven days after receipt of monies paid by the Owner or senior contractors for work performed by a sub-contractor “under the terms of the contract”.
A contractor is not liable for amounts “reducible due to breach of contract by the subcontractor”. Similar to prompt payment law, the contractor withholding payment must notify the subcontractor, in writing, of the reason for nonpayment, specifically identifying the contractual noncompliance, the dollar amount withheld and the lower level sub-contractor responsible for the contractual non-compliance. This last sentence gives general contractors the difficult task of determining how a subcontractor has subcontracted different parts of their work so that they can assign responsibility to the correct sub-subcontractors.
As this law applies to all contractors and sub-contractors, even if a public body does not pay a general contractor within 60 days, the general contractor is still required to pay his sub-contractor within this period. If an owner waits a full 60 days to make payment to the general contractor, the general contractor will have to pay their subcontractors before that same 60 day period has elapsed. Even more confusing, the subcontractor’s invoice may be dated before the date of the general contractor’s invoice to the owner, so the general contractor now has to monitor multiple 60-day clocks with the owner and each of his subs. – contractors. It promises to be a logistical headache for even the most sophisticated general contractors. General contractors will now likely engage in a lengthy process to review and approve every aspect of a subcontractor’s invoice, to date, often rejecting the invoice and frustrating subcontractors.
Again, failure to pay on time results in the provision of prompt payment interest at 1% per month, unless otherwise specified in the contract. Expect contracts to clearly state that “satisfactory completion” of subcontract work is something to be determined by the owner and that invoices are not appropriate or approved until the owner has not given his consent. Contractors are now strongly encouraged to include a nominal interest clause for late payments to avoid the statutory rate of 12% resulting from any violation of this new prompt payment requirement.
C. No payment at checkout in Virginia? Kind of.
The law also attempts to eliminate pay-on-pay provisions in Virginia, with a curious caveat:
Payment by the party contracting with the contractor shall not be a condition precedent to payment to any lower level sub-contractor, regardless of whether such contractor receives payment of monies due to such contractor, unless the contracting party with the Contractor either insolvent or a bankrupt debtor as defined in §50-73.79.
This means that each general contractor and subcontractor must be prepared to finance all work subcontracted to lower level contractors. General contractors will have to demand proof of financial assurance from owners, negotiating strict payment terms before proceeding with work, since payment is apparently due 60 days after being properly invoiced. Yet the law then provides an exception to this payment obligation if the owner or general contractor (“contractor with contractor”) is insolvent or has filed for Chapter 11 bankruptcy protection. , if the contractor or owner is insolvent, there is no obligation to pay subcontractors for work performed and properly invoiced. Contractors will now amend their subcontracts to make it clear that the pay-if-paid liability remains with the subcontractor. The law does not define insolvency and only refers to bankruptcy proceedings for business liquidation, not personal bankruptcies or reorganizations, leaving confusion about when these exceptions apply. Also, it is unclear if there is liability if the contractor “in good faith” determines the insolvency, but it is later determined that the owner was not insolvent.
Contractors at all levels now seem to be responsible for “slow payment” situations, but rarely for “no payment” projects where funding disappears and owners or contractors become “insolvent”. They may be able to limit their exposure to this new liability by carefully drafting payment and interest terms, paying strict attention to when work can be billed. While 60-day payment terms can be an improvement for contractors, many will still want to include faster payment requirements in their individual contracts.
New payment laws create unnecessary confusion in construction contracts. Owners and contractors are now legally required to make payment within 60 days of “satisfactory completion” of work subject to an invoice, regardless of whether the owner or upper-level contractor pays. Although this obligation does not apply when an owner is “insolvent”, the law provides little guidance on how a contractor should make this decision. However, owners and contractors can mitigate the impact of this law by inserting nominal interest charges. The Department of General Services is tasked with reviewing payment terms for public projects by the end of 2022, but contractors should not expect this review to resolve all the confusion caused by this status.
Ignoring this new law will only cause more headaches later. Contractors, at all levels, need to review their contracts now and proactively develop language to meet project needs in this changing construction landscape in Virginia.