What is that Ticking? Prompt Payment and Private Construction Contracts

On January 1, 2004, the Oregon Legislature changed the relationship among owners, contractors, subcontractors, and material suppliers involved in private construction projects. On that date, a new “prompt payment” law took effect. The law establishes rigorous requirements for account manage-ment, billing, progress payments, and the presentation of plans and specifications. Failure to comply with the new law could have profound and costly implications for parties involved in a private construction project.

WHO IS AFFECTED

While broad in scope, the prompt payment law does not apply to public improvement projects or to projects falling under the Oregon Low-Rise Residential Dwelling Code (formerly known as the One and Two Family Dwelling Code). In addition, the law only applies to private projects lasting longer than sixty days. If the parties wish to stray from the statutory requirements, each page of the plans, specifications, and the contract must include specific language altering the default provisions of the new law. This is the only way to “opt out” of the new law. Otherwise, the rights and obligations under the prompt payment law may not be altered.

OWNER LIABILITY AND RESPONSIBILITY

For owners, the prompt payment law creates critical timing requirements. An owner must make progress payments on a thirty-day cycle. The law requires an owner to send a written statement objecting to a bill or estimate within ten days of receipt. There are nine enumerated categories for objecting to a bill or estimate. If an owner fails to object using one of the categories within ten days, the bill or estimate is certified. An owner is required to make progress payments within fourteen days from the date of receipt of a bill or estimate, unless the owner timely objects. An owner is allowed to withhold amounts the owner reasonably expects are required to correct the written objections, together with reasonable retainages.

In addition to progress payments, the prompt payment law requires an owner to pay in full all remaining amounts due on a construction contract within seven days. This obligation exists when work is completed under a contract and the owner has approved the work. If a contract is apportioned, an owner is required to pay in full all amounts owing upon any portion of the work completed under the contract, unless the owner has timely objected in writing. An owner’s obligation to pay is not triggered unless or until the owner receives a bill or estimate. Once received, the clock for taking action begins to tick.

If an owner fails to make timely payments, interest accrues upon all outstanding amounts at the rate of eighteen percent per annum from the date due. The interest rate can be adjusted to a higher rate by contract between the parties. If an action, claim or arbitration follows, the prevailing party is entitled to their attorney’s fees and costs. In addition to these financial costs, the law allows a contractor to suspend performance after providing seven days written notice. If an account remains unpaid for longer than thirty days, the contractor may terminate the contract.

CONTRACTORS, SUBCONTRACTORS AND MATERIAL SUPPLIERS

Owners are not the only ones impacted by the prompt payment law. The new law also creates new rules for contractors, subcontractors, and material suppliers. A subcontractor or material supplier is entitled to payment of the full amount received by the contractor for their work or materials within seven days of receipt of a progress or final payment. Payment is only required after a billing or invoice is submitted by the subcontractor or material supplier to the contractor in compliance with the terms of the parties’ contract. Before payment is delivered, the owner and contractor can require a notarized waiver of lien claims. In addition, the new law allows a subcontractor, by written request, to require an owner to provide the subcontractor notice within five days of the owner making a progress or final payment.

Like owners, the law permits contractors or subcontractors to omit and challenge portions of a bill, invoice or estimate and to withhold the omitted portions from payment. Unlike the requirements placed upon owners, however, contractors and subcontractors are not obligated to submit a written notice or to take action within a specified period of time unless contractually obligated to do so. Consequently, the terms of a subcontractor’s contract or material invoice will be critical to defining the parties’ rights under the new prompt payment law.

A failure to comply with the terms of the law as supplemented by the parties’ contract can result in significant costs to the offending party. A failure to reasonably account for the application or use of payment could result in disciplinary action by the Construction Contractor’s Board. A payment delayed by more than seven days after receipt of either a progress or final payment incurs interest at the rate of eighteen percent per annum. Any action, claim or arbitration to collect payments or interest entitles the prevailing party to its reasonable attorney’s fees and costs.

A subcontractor also has the right to suspend and terminate its contract due to a delay in payment. This right arises regardless of whether the delay in payment comes from the owner or contractor. An important protection exists for subcontractors. If an owner objects to a portion or all of a billing or estimate affecting a subcontractor, but the basis for the owner’s objection is not the fault of or directly related to the subcontractor’s work, then the subcontractor may suspend or terminate its performance under the contract. A subcontractor is required to provide the owner and original contractor written notice of their intent to suspend performance or terminate the contract. Once suspended, a subcontractor is not required to provide additional labor, materials, products or services until the full amount is paid to the subcontractor, together with documented substantial and reasonable costs incurred for mobilization resulting from shutdown and start-up of a project.

CONCLUSION

The prompt payment law requires strict adherence to time management. The law has and will continue to have important and far reaching requirements, obligations, and benefits for parties to private construction projects. Owners, contractors, sub-contractors, and material suppliers should evaluate their account management and billing practices to ensure compliance with the new law. Owners, contractors, sub-contractors, and material suppliers should also review their plans, specifications, contracts, and invoice terms and conditions to ensure compliance and utilization of the new law for their benefit, whenever possible. Failure to do so could result in lost opportunities and come at a high financial cost.

If you would like more information about the new “prompt payment” law or construction law in general, please feel free to call our office.