Although nearly two have passed since the so-called prompt pay law was enacted, many contractors remain unclear on the rights, obligations and requirements under the law. In November 2010, the legislature passed “An Act Promoting Fairness in Private Construction Contracts,” G.L. c. 149, §29E. The purpose of the act was to expedite payments on private construction projects. As the law is still relatively new, there are no reported decisions from Massachusetts courts interpreting the law. Those in the industry are therefore left to make their own interpretations of the law’s requirements. What follows is a primer on the application of the act, the new time restrictions imposed by the law, and the affect on pay-if-paid provisions.
The prompt pay law applies only to contracts for private projects of at least $3,000,000 executed after November 8, 2010. While the law applies equally to commercial, residential or industrial projects, residential projects of between one and four units are excluded.
The central focus of the law is the mandate for “reasonable” time periods in processing applications for payment and requests for change orders. A party seeking payment must submit a written application within 30 days of the end of the first calendar month that occurs at least 14 days after it commenced work. For example, if ABC, Inc. starts work on June 15, it must submit its application for payment by July 30.
Responses to payment applications are also strictly regulated. Applications of first tier subcontractors must be approved or rejected by the prime contractor within 15 days. If the application is not approved or rejected within 15 days, it is deemed approved. The same requirement for timely response applies to the lower-tier subcontractors, although the time for responding is increased by seven days for each successive tier. Any partial or total rejection of a payment application must now include a written explanation of the factual and contractual basis for the rejection, as well as a certification that the rejection was made in good faith. Once approved, payment must be made within 45 days.
Written change order requests must be approved or rejected within 30 days after the later of the date on which the request is submitted or the commencement of the performance of the requested work. The remaining mandates concerning change orders mimic those pertaining to the payment application process. If a change order is not approved or rejected within the stated time period, it is deemed accepted. Successive tiers are allowed seven additional days to respond. If a change order is rejected, the rejection must include a written explanation and certification that the rejection is made in good faith.
In addition to mandating reasonable time periods, the prompt pay law severely limits use of the so-called “pay-if-paid” provision. Prior to the act, if an owner became insolvent or refused to pay a prime contractor for any reason, the contractor could rely on the pay-if-paid provision to avoid paying its subcontractors. Now, pay-if-paid is deemed void unless: (1) the subcontractor’s work is deemed defective with written notice given of the defect, and the subcontractor failed to cure the defect, or (2) the party making payment becomes insolvent after a mechanics’ lien and all other reasonable legal remedies against the insolvent party have been pursued.
If the prompt pay law applies to your project, it is important to have a working understanding of the rights, obligations and requirements established by the law. Check back for updates on case law interpreting or affecting the act.