08/09/2024
The Texas Prompt Payment Act: a Powerful Tool for Contractors
The Texas Prompt Payment Act is a key piece of legislation meant to ensure timely payments across all levels of a construction project and establish consequences for non-compliance. The Prompt Payment Act is a powerful tool available to contractors to ensure that timely compensation is received so that projects can remain on track and within budget.
Timelines for Payments. The Prompt Payment Act outlines specific deadlines for various parties in a construction project:
1. Payments from Owners to Contractors: Owners must pay contractors within 35 days of receiving an invoice for work that has been satisfactorily completed or for materials that are either appropriately stored or specially fabricated.
2. Payments from Contractors to Subcontractors: Within 7 days after receiving the Owner's payment, Contractors must then pay their subcontractors and suppliers.
3. Payments from Subcontractors to Lower-tier Subcontractors: Within 7 days after receiving payment from the contractor for the relevant work or materials, subcontractors must pay their lower-tier subcontractors
Exception for Disputed Payments - The Prompt Payment Act allows an owner of contractor to withhold payment in the event of a "good faith dispute." That term is not defined in the statute, so consult a Texas construction law attorney to advise you about your specific situation should a dispute arise. In residential projects, 110% of the disputed amount can be withheld, while in other types of projects, only 100% may be withheld.
When invoking a good faith dispute, the withholding party must provide a detailed notice explaining the reasons for nonpayment. If the dispute involves work performed by a subcontractor, the subcontractor must be given a reasonable opportunity to either rectify the issues or propose fair compensation for items that cannot be promptly corrected.
Interest on Overdue Payments - If payments are delayed beyond the applicable deadlines, the party owed payment is entitled to interest on the overdue amount at the rate of 1.5% per month or 18% per year, which accrues from the original due date until the payment is made or a court issues a judgment in a lawsuit under the Prompt Payment Act.
Right to Suspend Work - The Prompt Payment Act gives contractors and subcontractors the right to suspend work if an owner fails to pay undisputed amounts by the applicable deadline. However, this right can only be exercised after giving the owner written notice of the intent to suspend work, with at least 10 days’ notice before the suspension is set to occur.
The Prompt Payment Act Clarifies Contractor Rights When Faced with Unsigned Change Orders - Contractors and subcontractors are not obligated to proceed with additional work directed by an owner unless they receive a written and fully executed change order. This is particularly relevant when the value of the additional work, combined with any prior additional work not covered by a signed change order, exceeds 10% of the original contract amount. However, refusing to complete additional work requested by the owner can affect other parts of the project. In that situation, is the contractor protected who refuses to proceed? Yes, the Prompt Payment Act provides that a contractor or subcontractor who chooses not to proceed with such work under these conditions is protected from liability for any damages that may arise from this decision.
If you have questions about the Prompt Payment Act and how it might impact your construction project, contact a Texas construction law attorney to discuss your specific situation and how best to protect your business.
