Trends In Prompt Payment Acts Governing Private Construction Contracts

Prompt Payment Acts ("PPAs"), which the federal government and many states have enacted, generally provide legal recourse against owners or contractors who fail to meet payment obligations required by construction contracts. The number of PPAs governing private construction contracts is on the rise, and in the past year several amendments to such PPAs went into effect in Delaware, Oregon, and California. Additionally, new legislation was introduced in Nebraska and Colorado in January. This area of the law is in flux, and case law is sparse due to the recent enactment and amendment of many of these private PPAs. However, a number of important trends are developing across the United States. This Commentary addresses the rise of private PPAs, how PPA statutes work, and notable trends in drafting and executing construction contracts.

The rise of private PPAs

The first PPAs governed contracts with public entities. More than 30 years ago, Congress drafted legislation mandating prompt payment in contracts with the federal government. Known as the Prompt Payment Act of 1982, Pub. L. No. 97-177, 31 U.S.C. §§ 3901 et seq., the law entitles contractors to recover interest at a set rate if, upon proper notice, the federal government fails to make timely payment.1 It also requires contractors to make prompt payment to subcontractors.2 In 1988, the law was amended to include specific provisions relating to construction contracts.3 These provisions set out time limits, interest rates, and other restrictions on construction contracts and payment, including the mandate that contractors must pay interest on any amount that they have been paid but have failed to earn due to deficient performance.4

Following the passage of the federal PPA, many states began to follow suit with their own versions of PPAs.5 PPAs governing public contracts were enacted quickly and have been in place in 49 of the 50 states for well over a decade. However, PPAs governing private contracts are continuing to gain steam. Today, two-thirds of the states have enacted a PPA governing private contracts, and states are continuing to revise and develop the statutes they have recently enacted.

The American Subcontractors Association ("ASA") has been especially active in lobbying states for the passage of PPAs, based on concerns that subcontractors are not privy to negotiations between the owner and prime contractor, that they might bear the risk of owner nonpayment, and that subcontractors often have to wait a lengthy period of time before suspending work based on nonpayment.6 The ASA's efforts convinced several states to legislate or to judicially recognize that contractual clauses shifting the burden of nonpayment to subcontractors are void as a matter of public policy.7 Other states included limitations on such clauses within their PPAs, or have otherwise employed PPAs to address some of these concerns.

How private PPA statutes work

Private PPA statutes are anything but uniform, but they share some common components, which generally set forth penalties for late payments in certain contractual situations. Every PPA statute is unique in its requirements and applicability, so in any given contract scenario, potentially applicable PPA statutes should be closely scrutinized.

At its outset, a PPA statute generally defines the parties and situations to which it applies. Private PPA statutes usually apply to contracts for the improvement of land (including everything from demolition to construction), and PPA purpose statements tend to reflect the states' interest in the economic stability and viability of the construction industry. Generally, PPA statutes identify the contractual situations in which they apply, such as to disputes between the owner and contractor or, more frequently, to disputes between contractor and subcontractor.

There are also requirements for invoicing, payment deadlines, and interest rates on overdue payments. PPAs usually include standards or events to trigger the date upon which the invoicing party is entitled to payment. From that date, PPAs impose a deadlineusually...