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OP-ED: Prompt Payment: Some Answers, More Questions

Daily Journal of Commerce Oregon
February 21, 2017

Overview

Along with timely completion, payment is one of the most important aspects of any project. The frequency of payment disputes between project owners, prime contractors,
subcontractors and material suppliers has increased as projects that started when the
economy bounced back are coming to a close.

Payment timeline requirements
Oregon law requires all parties to construction agreements to adhere to prompt payment
obligations. Failure to comply with even the smallest detail of these requirements can
potentially expose parties to thousands of dollars in penalties. While a whole treatise could be written on this topic, following is a look at some of the key aspects of Oregon’s prompt payment scheme for private construction projects, along with some discussion regarding issues raised by prompt payment rules.

On almost all private construction projects, a project owner must make progress payments to a prime contractor no later than 14 days after the date a billing is received. Final payment must be made no later than 7 days after the project owner approves the prime contractor’s work.

An owner may make progress payments or final payment later than the 14-day/7-day time
periods if the owner provides drawings and specifications that expressly state that an
extended payment period is allowed. The project owner must also identify the extended
payment period as a specific number of days after the date that the billing is received or the owner approves the work.

One frequently overlooked requirement of an alternative payment timeline is that the
timeline information must be on each page of project drawings and specifications. The
owner may assume that codifying its agreement with the prime contractor regarding
payment timelines in the construction contract is enough. Repeating that agreement on
each page of the drawings and specifications may seem unnecessary, but it is required by
law.

One way an owner can plan for compliance with this requirement is to have a stamp made
(with blanks provided for the number of days that can be filled in later, depending on the
project) that includes the required language regarding alternative payment timelines. Using a stamp makes providing specific information on each page less onerous.

In terms of payment from the prime contractor to its subcontractors, if a subcontractor has
performed in accordance with a construction contract, the prime contractor must pay its
subcontractor within seven days of its receipt of payment from the project owner for work
performed by the subcontractor.

The same is true for payments from prime contractors to material suppliers. And the same
rules apply down the project chain – for example, a subcontractor must pay its lower-tier
subcontractors and suppliers within seven days of receiving payment from the prime
contractor.

Arising questions
While prompt payment rules give detailed direction to owners and contractors in some
respects, how they apply in certain specific factual scenarios is unclear.

One issue that occasionally arises is whether a party must adhere to prompt payment rules if an accounting or clerical error is made in creating the applications for payment (i.e., billings). For example, what happens if the prime contractor presents to the project owner that 50 percent of a subcontractor’s work is complete and the project owner issues payment to the prime contractor accordingly, only to find out later – but before the prime contractor has issued payment to the subcontractor – that the percentage completion was listed in error? Does the prime contractor have to comply with prompt payment timelines even though the subcontractor is not entitled to payment for that work?

To further complicate things, what happens if the prime contractor issues a credit back to
the project owner, based on the inadvertent accounting/clerical error? Is the prime
contractor still on the hook for issuing payment to the subcontractor within seven days?
These questions are not addressed expressly in the current statutory scheme.

There are other issues surrounding prompt payment. For example, what happens if a prime contractor discovers defective work performed by its subcontractor after being paid by the owner but before the seven-day time period expires? And what if a prime contractor, subcontractor or material supplier fails to meet other contractual obligations of a construction contract? How does that impact prompt payment obligations?

Penalties for noncompliance
Project owners, prime contractors and subcontractors should all pay very close attention to prompt payment rules because one violation subjects the offending party to paying at least 1.5 percent interest on the unpaid balance per month (or fraction of a month) until it is paid. More importantly, any action, claim or arbitration brought to collect such interest entitles the prevailing party to be awarded its costs and attorney fees. Plaintiffs are increasingly tacking on prompt payment claims against owners and prime contractors to their other substantive claims, in a strategic attempt to recover attorney fees – significantly increasing exposure for liability.

Given the complexity of prompt payment rules, it is always best to contact a construction
attorney anytime you are faced with a payment issue. Which prompt payment rules apply
(e.g., public, private, contractual), whether a violation has occurred, and how best to react in the event of a violation are complex questions that require specific, strategic answers.

Column first appeared in the Daily Journal of Commerce on February 21, 2017.

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