For this Monday edition of Guest Post Friday, we welcome a new contributor, Adam Kreitman. Adam (@amkreitman) is a project manager at North East Interior and an Army Corps Certified Quality Control Manager.
Background
Gov. Deval Patrick passed an act that profoundly affected payment terms on private construction projects in November of 2010. The “prompt-pay” law governs all construction projects greater than $3 million; except for one- to four-unit residential projects. The primary focus of the “Prompt-Pay” Law is to create strict standards on disapproval of requisitions and a time-table on review and approval of extra work and change orders.
According to the now 2 year old law, a contractor/subcontractor/vendor seeking compensation must submit a requisition within 30 days of the end of the first calendar month that occurs at least 14 days after it commenced work. The review of payment applications for the 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 considered approved. The lower tier sub-contractors must comply with the same regulations, but they are allowed an extra seven days of review for each tier below the prime contractor. If any portion of the requisition is deemed to be inaccurate or rejected, the “prompt-pay” law declares that a written explanation stating the factual and contractual basis of rejection must be sent with the rejection letter. Lastly, this rejection letter must clarify that the review of the requisition was “made in good faith.” Any payment made after approval or partial rejection must be paid within 45 days.
Change orders must now be reviewed or rejected within 30 days after the date the change was submitted or the start of the requested work. Once again, If the change order is not accepted or rejected within the given time period of 30 days, it is considered accepted. The lower tiers below the prime contractor are given an extra seven days per lower tier just like the review of the requisitions. Any rejection of the change orders must mimic the rejection of the requisition’s as well; a written explanation stating the factual and contractual basis of rejection must be sent with the rejection letter and it must be “made in good faith.”
Furthermore, the “prompt-pay” law mandates that pay-if-paid clauses are “void and unenforceable,” unless money has not been paid due to nonperformance by the person seeking payment, who has received written notice of the default and has failed to cure or the payor is insolvent or becomes insolvent within 90 days after the pay request is made, AND the party seeking to enforce conditional payment terms has (a) filed a notice of contract, and (b) is pursuing “all reasonable legal remedies” to recover payment “unless and until there is a reasonable likelihood such action will not result in obtaining payment.”
Thoughts
This law is obviously a subcontractors best friend, and unless the prime contractor is completely on top of all his/her paper work, this law creates a heavier burden on their shoulders. If a subcontractor submits a change order and by simple human error the change order is neither approved or rejected within 30 days, this law dictates that the subcontractor is now due money for work they may have not performed.
This law further demonstrates that the era of a firm handshake and eye contact is over. Project Managers must constantly protect themselves with continuous chains of emails and can no longer rely on phone conversations. If you cannot prove you rejected a requisition or a change order, then you will most likely own it down the road.
Often change orders have to be approved by the architect before they can be approved by the contractor. Getting them submitted to the architect, approved and returned within 30 days is often difficult. However, now the consequences of not getting this done within 30 falls solely on the contractor.