The construction industry is a cornerstone of Texas’s robust economy, and timely payments are critical for maintaining the health of this sector. To ensure that contractors, subcontractors, and suppliers are paid promptly for their work, Texas has implemented the Texas Prompt Payment Act (“the Act”), found in Chapter 28 of the Texas Property Code. This blog post breaks down the key elements of the Texas Prompt Payment Act.
What is the Texas Prompt Payment Act?
The Texas Prompt Payment Act is designed to expedite payments and reduce financial disputes in the construction industry. It establishes deadlines for payments, addresses the consequences of late payments, and provides recourse for parties who do not receive timely payments.
Key Provisions of the Act
- Payment Deadlines
The Act specifies different payment deadlines for various parties involved in a construction project:
- Owners to Contractors: Owners must pay contractors within 35 days after receiving an invoice for properly performed work or suitably stored or specially fabricated materials.
- Contractors to Subcontractors: Contractors must pay their subcontractors and suppliers within 7 days of receiving payment from the owner for the subcontractor’s or supplier’s work.
- Subcontractors to Lower-tier Subcontractors: Similarly, subcontractors must pay their lower-tier subcontractors within 7 days of receiving payment from the contractor for the lower-tier subcontractor’s or supplier’s work.
- Exception for Good Faith Dispute
There is an exception for withholding payment in the case of a “good faith dispute.” This term is not defined, but it generally refers to a legitimate and honest disagreement over whether certain amounts are owed, including, but not limited to, a dispute over whether the work was performed in a proper manner. On residential projects, 110% of the disputed amount may be withheld. On all other projects, only 100% of the disputed amount may be withheld.
A notice that a good faith dispute exists must include a list of specific reasons for nonpayment. If a reason specified includes labor, services, or materials provided by a subcontractor that are not provided in compliance with the contract, the subcontractor is entitled to a reasonable opportunity to: (1) cure the listed items; or (2) offer a reasonable amount to compensate for listed items that cannot be promptly cured.
- Interest on Late Payments
If a payment is not made within the specified timeframe, the unpaid party is entitled to interest on the overdue amount. The interest rate is set at 1.5% per month or 18% per year, calculated from the due date until the payment is made or a judgment is entered in a lawsuit brought under the Act.
- Right to Suspend Work
Under the Act, if an owner fails to pay the contractor any undisputed amounts owed within the statutory time limits, then the contractor and any unpaid subcontractors have the right to suspend work after providing written notice. This notice must be given at least 10 days before the intended suspension date.
- Unsigned Change Orders
A contractor or subcontractor may elect not to proceed with additional work directed by an owner if: (1) the contractor or subcontractor has not received a written, fully executed change order for the owner-directed additional work; and (2) the aggregate actual or anticipated value of the additional work plus any previous owner-directed additional work for which the contractor or subcontractor has not received a written, fully executed change order exceeds 10 percent of the contractor’s or subcontractor’s original contract amount. A contractor or subcontractor who elects not to proceed with additional work is not responsible for damages associated with the election not to proceed.
Practical Implications for Contractors and Property Owners
- For Contractors: Understanding the payment deadlines and your rights under the Act is crucial. Ensure that your invoices are accurate and submitted on time to avoid payment delays. If you experience delayed payments, document your communications and provide proper notices if you need to suspend work.
- For Owners: Timely payments are essential to keep your projects on track and avoid interest penalties. Review and approve invoices promptly and maintain clear communication with your contractors to prevent misunderstandings and disputes.
- For Subcontractors and Suppliers: Know your rights regarding prompt payment from contractors. If you face payment delays, you are entitled to interest and can take steps to suspend work if necessary. Keep thorough records of your invoices and payments received.
Conclusion
The Texas Prompt Payment Act is a vital piece of legislation that helps ensure fair and timely payments in the construction industry. By understanding and adhering to its provisions, contractors, subcontractors, suppliers, and property owners can avoid disputes.
Always consult with legal professionals if you have specific questions or face disputes related to payment issues in your construction projects.
By staying informed and proactive, all parties involved can help maintain the integrity and financial stability of Texas’s vibrant construction sector.
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