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Disputes & Deadlines: What You Need to Know About California Prompt Payment Laws

Disputes & Deadlines: What You Need to Know About California Prompt Payment Laws

January 31, 2019

Contractors are hired by clients for their specific specialties. It can be their ability to put together and run a whole construction project as with general contractors, or it could be for their reputation in more specific areas like plumbing and roofing.

But far too often, contractors are forced to play a major part in the financing side of things. How? When payments are delayed, contractors are virtually assuming the financial risk and are practically financing the project with their resources.

From general contractors failing to pay subcontractors and suppliers on time to owners holding the funds due to general contractors, there are countless situations where the money is stuck in a bottleneck, and the payments get delayed, even when the work has been favorably performed, and supplies successfully delivered.

California’s Prompt Payment Laws prevent contractors and subcontractors from taking the role of unwitting financiers by allowing them to collect penalties when payments are delayed. California’s prompt payment laws prevent these unfortunate situations and ensure contractors, subcontractors, and suppliers get paid on time.

California Prompt Payment Laws – Guidelines, Deadlines, and Penalties

Getting paid on time is crucial. It allows contractors and subcontractors to manage their cash flow well and make timely payments to their suppliers, subcontractors, and laborers. California prompt payment laws have made it clear that the goal is to promote timely payments on both private and public projects and ensure that both parties satisfy their contractual obligations.

To enforce this, the Calfornia prompt payment laws, also called “prompt payment statutes,” are peppered throughout CA legislative code and have established payment deadlines and respective penalties on owners who don’t pay their general contractors on time and for general contractors who delay payments to their subcontractors.

The California prompt payment laws established definite deadlines for both progress payments and retention payments.

Here’s an overview of the deadlines, penalties and other guidelines.

Progress Payments on Private Works

  • Owner paying General Contractor: within 30 days of the payment request
  • General Contractor paying subcontractor: within 30 days of receipt of funds.
  • The penalty for all delayed private work progress payments: 2% per calendar month
  • In case of a legal proceeding, attorney fees can be included in the penalty.
  • The Owner or General Contractor are allowed to withhold 150% of the disputed amount in a good faith dispute

California Prompt Payment Law on Private Work Progress Payments: CA Civ Code § 3260.1

(a) This section is applicable with respect to all contracts entered into on or after January 1, 1992, relating to the construction of any private work of improvement.

(b) Except as otherwise agreed upon in writing, the owner shall pay to the contractor, within 30 days following receipt of a demand for payment in accordance with the contract, any progress payment due thereunder as to which there is no good faith dispute between the parties. In the event of a dispute between the owner and the contractor, the owner may withhold from the progress payment an amount not to exceed 150 percent of the disputed amount. If any amount is wrongfully withheld in violation of this subdivision, the contractor shall be entitled to the penalty specified in subdivision (g) of Section 3260.

(c) Nothing in this section shall be deemed to supersede any requirement of Section 3260 respecting the withholding of retention proceeds.

(Amended by Stats. 1999, Ch. 982, Sec. 5. Effective January 1, 2000. Repealed as of July 1, 2012, by Stats. 2010, Ch. 697.)

Retention Payments on Private Projects

  • The Owner must release retention to General Contractor within 45 days of work completion
  • General Contractor must release retention to subcontractor within 10 days of receiving the retention payment for the project
  • General Contractors must send the Owner a written notice that work has been satisfied according to the contract
  • Upon receipt of the written notice, the Owner has 10 days to accept or reject the work
  • The penalty for delayed private work retention payments is 2% per calendar month
  • In case of legal proceeding, attorney fees* are included in the penalty.
  • The Owner or General Contractor are allowed to withhold 150% of the disputed amount in a good faith dispute
  • Lender financed projects are not covered

California Prompt Payment Law on Private Work Progress Payments: Cal. Civil Code §3260

(a)This section is applicable with respect to all contracts entered into on or after July 1, 1991, relating to the construction of any private work of improvement. However, the amendments made to this section during the 1992 portion of the 1991–92 Regular Session of the Legislature are applicable only with respect to contracts entered into on or after January 1, 1993, relating to the construction of any private work of improvement. Moreover, the amendments made to this section during the 1993 portion of the 1993–94 Regular Session of the Legislature are applicable only with respect to contracts entered into on or after January 1, 1994, relating to the construction of any private work of improvement.

(b)The retention proceeds withheld from any payment by the owner from the original contractor, or by the original contractor from any subcontractor, shall be subject to this section.

(c)Within 45 days after the date of completion, the retention withheld by the owner shall be released. “Date of completion,” for purposes of this section, means any of the following:

(1)The date of issuance of any certificate of occupancy covering the work by the public agency issuing the building permit.

(2)The date of completion indicated on a valid notice of completion recorded pursuant to Section 3093.

(3)The date of completion as defined in Section 3086.

However, release of retentions withheld for any portion of the work of improvement which ultimately will become the property of a public agency may be conditioned upon the acceptance of the work by the public agency. In the event of a dispute between the owner and the original contractor, the owner may withhold from the final payment an amount not to exceed 150 percent of the disputed amount.

(d)Subject to subdivision (e), within 10 days from the time that all or any portion of the retention proceeds are received by the original contractor, the original contractor shall pay each of its subcontractors from whom retention has been withheld, each subcontractor’s share of the retention received. However, if a retention payment received by the original contractor is specifically designated for a particular subcontractor, payment of the retention shall be made to the designated subcontractor, if the payment is consistent with the terms of the subcontract.

(e)If a bona fide dispute exists between a subcontractor and the original contractor, the original contractor may withhold from that subcontractor with whom the dispute exists its portion of the retention proceeds. The amount withheld from the retention payment shall not exceed 150 percent of the estimated value of the disputed amount.

(f)Within 10 days of receipt of written notice by the owner from the original contractor or by the original contractor from the subcontractor, as the case may be, that any work in dispute has been completed in accordance with the terms of the contract, the owner or original contractor shall advise the notifying party of the acceptance or rejection of the disputed work. Within 10 days of acceptance of the disputed work, the owner or original contractor, as the case may be, shall release the retained portion of the retention proceeds.

(g)In the event that retention payments are not made within the time periods required by this section, the owner or original contractor withholding the unpaid amounts shall be subject to a charge of 2 percent per month on the improperly withheld amount, in lieu of any interest otherwise due. Additionally, in any action for the collection of funds wrongfully withheld, the prevailing party shall be entitled to his or her attorney’s fees and costs.

(h)It shall be against public policy for any party to require any other party to waive any provision of this section.

(i)This section shall not be construed to apply to retentions withheld by a lender in accordance with the construction loan agreement.

Progress Payments to Subcontractors – Public Works for the State of California

  • The Project Owner/Agency must release payment to General Contractor within 30 days of the payment request. Longer timelines may apply for certain agencies (e.g., 39 days for the California University System)
  • The General Contractor must release payment to the Subcontractor within 10 days of receiving the project payment.
  • The penalty for delayed public work progress payments is 2% per calendar month
  • In case of legal proceeding, attorney fees* are included in the penalty.
  • The Owner or General Contractor are allowed to withhold 150% of the disputed amount in a good faith dispute

California Prompt Payment Law on CA State Public Work Progress Payments to Subcontractors: Public Contract Code § 10262.5

(a) Notwithstanding any other provision of law, a prime contractor or subcontractor shall pay to any subcontractor, not later than seven days of receipt of each progress payment, the respective amounts allowed the contractor on account of the work performed by the subcontractors, to the extent of each subcontractor’s interest therein. In the event that there is a good faith dispute over all or any portion of the amount due on a progress payment from the prime contractor or subcontractor to a subcontractor, then the prime contractor or subcontractor may withhold no more than 150 percent of
the disputed amount.

Any contractor who violates this section shall pay to the subcontractor a penalty of 2 percent of the amount due per month for every month that payment is not made. In any action for the collection of funds wrongfully withheld, the prevailing party shall be entitled to his or her attorney’s fees and costs.

(b) This section shall not be construed to limit or impair any contractual, administrative, or judicial remedies otherwise available to a contractor or a subcontractor in the event of a dispute involving late payment or nonpayment by a contractor or deficient subcontract performance or nonperformance by a subcontractor.

(c) On or before September 1 of each year, the head of each state agency shall submit to the Legislature a report on the number and dollar volume of written complaints received from subcontractors and
prime contractors on contracts in excess of three hundred thousand dollars ($300,000), relating to violations of this section.

Retention Payment to Subcontractors – Public Works for the State of California

  • The Project Owner/Agency must release payment to General Contractor within 60 days of completion.
  • The General Contractor must release payment to the Subcontractor within 7 days of receiving the project payment.
  • Penalty 2% per Month
  • Attorney Fees
  • Owner or Contractor may withhold 150% of the disputed amount.

California Prompt Payment Law on CA State Public Work Retention Payments to Subcontractors: Public Contract Code §7107

(a) This section is applicable with respect to all contracts entered into on or after January 1, 1993, relating to the construction of any public work of improvement.

(b) The retention proceeds withheld from any payment by the public entity from the original contractor, or by the original contractor from any subcontractor, shall be subject to this section.

(c) Within 60 days after the date of completion of the work of improvement, the retention withheld by the public entity shall be released. In the event of a dispute between the public entity and the original contractor, the public entity may withhold from the final payment an amount not to exceed 150 percent of the disputed amount. For purposes of this subdivision, “completion” means any of the following:

(1) The occupation, beneficial use, and enjoyment of a work of improvement, excluding any operation only for testing, startup, or commissioning, by the public agency, or its agent, accompanied by cessation of labor on the work of improvement.

(2) The acceptance by the public agency, or its agent, of the work of improvement.

(3) After the commencement of a work of improvement, a cessation of labor on the work of improvement for a continuous period of 100 days or more, due to factors beyond the control of the contractor.

(4) After the commencement of a work of improvement, a cessation of labor on the work of improvement for a continuous period of 30 days or more, if the public agency files for record a notice of cessation or a notice of completion.

(d) Subject to subdivision (e), within seven days from the time that all or any portion of the retention proceeds are received by the original contractor, the original contractor shall pay each of its subcontractors from whom retention has been withheld, each subcontractor’s share of the retention received. However, if a retention payment received by the original contractor is specifically designated for a particular subcontractor, payment of the retention shall be made to the designated subcontractor, if the payment is consistent with the terms of the subcontract.

(e) The original contractor may withhold from a subcontractor its portion of the retention proceeds if a bona fide dispute exists between the subcontractor and the original contractor. The amount withheld from the retention payment shall not exceed 150 percent of the estimated value of the disputed amount.

(f) In the event that retention payments are not made within the time periods required by this section, the public entity or original contractor withholding the unpaid amounts shall be subject to a charge of 2 percent per month on the improperly withheld amount, in lieu of any interest otherwise due. Additionally, in any action for the collection of funds wrongfully withheld, the prevailing party shall be entitled to attorney’s fees and costs.

(g) If a state agency retains an amount greater than 125 percent of the estimated value of the work yet to be completed pursuant to Section 10261, the state agency shall distribute undisputed retention proceeds in accordance with subdivision (c). However, notwithstanding subdivision (c), if a state agency retains an amount equal to or less than 125 percent of the estimated value of the work yet to be completed, the state agency shall have 90 days in which to release undisputed retentions.

(h)Any attempted waiver of the provisions of this section shall be void as against the public policy of this state.

(Amended by Stats. 1998, Ch. 857, Sec. 3. Effective January 1, 1999.)

Prompt Payment Guidelines – CA Local Government Public Works

  • The Public Entity must pay the Prime Contractor within 30 days of Receipt of Valid Pay Request
  • The Pay Request’s Validity can be disputed within 7 days or receiving the request.
  • Payment delays shall incur interest at the Legal Rate payable by the Public Entity
  • Different jurisdictions have more detailed Prompt Payment guidelines outlined in Municipal Codes or Ordinances

California Prompt Payment Laws on Local Gov’t Public Works: Public Contract Code §20104.50

(a) (1) It is the intent of the Legislature in enacting this section to require all local governments to pay their contractors on time so that these contractors can meet their own obligations. In requiring prompt payment by all local governments, the Legislature hereby finds and declares that the prompt payment of outstanding receipts is not merely a municipal affair, but is, instead, a matter of statewide concern.

(2) It is the intent of the Legislature in enacting this article to fully occupy the field of public policy relating to the prompt payment of local governments’ outstanding receipts. The Legislature finds and declares that all government officials, including those in local government, must set a standard of prompt payment that any business in the private sector which may contract for services should look towards for guidance.

(b) Any local agency which fails to make any progress payment within 30 days after receipt of an undisputed and properly submitted payment request from a contractor on a construction contract shall pay interest to the contractor equivalent to the legal rate set forth in subdivision (a) of Section 685.010 of the Code of Civil Procedure.

(c) Upon receipt of a payment request, each local agency shall act in accordance with both of the following:

(1) Each payment request shall be reviewed by the local agency as soon as practicable after receipt for the purpose of determining that the payment request is a proper payment request.

(2) Any payment request determined not to be a proper payment request suitable for payment shall be returned to the contractor as soon as practicable, but not later than seven days, after receipt. A request returned pursuant to this paragraph shall be accompanied by a document setting forth in writing the reasons why the payment request is not proper.

(d) The number of days available to a local agency to make a payment without incurring interest pursuant to this section shall be reduced by the number of days by which a local agency exceeds the seven-day return requirement set forth in paragraph (2) of subdivision (c).

(e) For purposes of this article:

(1) A “local agency” includes, but is not limited to, a city, including a charter city, a county, and a city and county, and is any public entity subject to this part.

(2) A “progress payment” includes all payments due contractors, except that portion of the final payment designated by the contract as retention earnings.

(3) A payment request shall be considered properly executed if funds are available for payment of the payment request, and payment is not delayed due to an audit inquiry by the financial officer of the local agency.

(f) Each local agency shall require that this article, or a summary thereof, be set forth in the terms of any contract subject to this article.

(Added by Stats. 1992, Ch. 799, Sec. 2. Effective January 1, 1993.)

California Prompt Payment Laws: Good Faith Disputes

There are situations where the payor (Owner or General Contractor) disputes the payment owed, usually due to a claim that the other party didn’t satisfy their side of the contract. Generally, the prompt payment statutes protect the right of general contractors and subcontractors to get paid what’s due to them on time.

To ensure fairness, the law provides a safe harbor provision for owners and general contractors which allows them to withhold 150% of the disputed amount when there is a good faith dispute.

The latter is a recent change.

Previously, based on the interpretation of the controlling case law of the safe harbor provision, owners and general contractors in the middle of a good faith dispute were allowed to withhold payments as long as it doesn’t exceed 150% of the disputed amount even if the dispute involves a progress payment and/or retention. The right of owners and general contractors to withhold payments was honored while contractors and subcontractors would not be paid while exploring other avenues of pursuing payment — until recently.

There’s no telling how much not getting the retention impacted cash flow, AR management, and the overall operations of a contractor or subcontractor when they find themselves in the middle of a dispute and not receiving payments at all. Because of this, seeking to narrow the scope of the safe harbor exception in interpretation became increasingly popular.

The definitive case on how the safe harbor exception is interpreted today is United Riggers & Erectors, Inc. v. Coast Iron & Steel Co.

Here are the facts: Universal Studios hired Coast Iron for metal work on its Transformers: The Ride theme park attraction. Coast, in turn, subcontracted United Riggers for the work on a lump sum price. United completed the work according to the contract and to Coast’s requirements. United also charged additionals from Coast’s change orders. Coast disputed and refused to pay for the change order and also withheld around $150,000.00 in retention payment on the basis of the dispute over the change order.

In this case involving a private project, United Riggers, the subcontractors, took the general contractor, Coast, to court for unpaid change orders and prompt payment penalties, among others. Coast didn’t dispute that there’s indeed money owed and they eventually paid United in full with no penalties or interest — even before the hearings began.

However, the CA Court of Appeal found that Coast violated Prompt Payment Laws by withholding retention that was not included in the case. It was as if Coast was holding the retention payment hostage similar to an interest-free loan, as the dispute on the change order was being resolved.

The Court ruled that an owner or contractor is only allowed to withhold retention payments with no penalty when the dispute involves the payment of retention funds specifically. The owner was not allowed by the court to use other payment disputes (in this case, change order and delay claims) to lay the basis to refuse to release retention proceeds that are not disputed.

Coast’s failure to release retention payment when the retention was not named in the dispute made the situation a perfect trigger to assess prompt payment penalties. The court stated that allowing Coast to withhold retention, “would unduly increase the leverage of owners and primary contractors over smaller contractors or subcontractors by discouraging subcontractors from making legitimate claims for fear of delaying the retention payment.”

The decision on the United Riggers v. Coast case has empowered contractors and subcontractors to assert their right to prompt payment while avoiding situations where payment for other parts of the project can be used as leverage or a financial wrench against them.

Protecting your right to lien

California Prompt Payment Laws provide contractors and subcontractors the legal basis to recover penalties when payments get delayed. Despite this, there are a lot of scenarios where contractors and subcontractors can emerge in the losing side. It’s imperative for any business operating in construction to be proactive when it comes to encouraging prompt payment and also in being prepared in anticipation of possible payment issues.

The most powerful of these payment issue remedies available to contractors and subcontractors is the mechanics lien. The mechanics lien puts a legal claim on the property where the work was done  in the event that the owner or the prime contractor fails to settle their dues.

California has its own set of guidelines when it comes to securing your right to lien, beginning from the Preliminary 20-day Notice or California’s version of the pre-lien. Streamlining your lien process starting for the pre-lien filing can be cumbersome, especially if you’re taking in hundreds of contracts each year. By using Handle, you can get pre-liens filed for all your contracts accurately and easily, ultimately getting you paid faster and securing your lien rights in case the need to file the mechanics lien arises.