Prompt Payment Laws Can Bolster Your Chances of Collecting Payments

As a materials supplier, maintaining leverage over some of the higher ups within the contractual chain can be a difficult task. To help mitigate this issue, suppliers should consider all of the tools in their toolbox—including the Prompt Payment Act.

The Prompt Payment Act allows suppliers to hold some parties accountable for failing to meet payment deadlines. While the federal Prompt Payment Act applies to companies that provide material or labor on federal construction projects, many states enforce their own prompt payment laws on private and public projects.

Because prompt payment laws vary by state, credit professionals should know how they can effectively use these statutes in the states that they do business. Katy Baird, construction law attorney at Andrews Myers PC (Houston, TX), shared some of the benefits of Texas's Prompt Payment Act, including:

• The right to stop work due to nonpayment.
• The ability to charge interest at 18% per year (or 1.5% per month) from the dates the amounts became due.
• Recovery of attorney's fees.
• Rights that cannot be waived under this act.

During a recent meeting of the NACM Construction Thought Leadership Discussion Group, Baird also suggested using prompt payment laws in conjunction with construction trust fund statutes as an even more effective way of gaining leverage. "Provided your state maintains a prompt payment act and construction trust fund statute, it is incredibly helpful to include a reference to those statutes and their potential penalties in your demand letters," Baird said. "The sooner the party above you in the chain of construction understands its potential liability for violating those acts the more likely you are to get paid prior to filing a lawsuit."

These statutes can provide more leverage "whether you have lien rights or not," Baird said. They also can serve as attention grabbers that bring higher ups to the table. "In Texas, the trust fund violation statute allows you to assert individual liability against the parties that exercise improper control over the funds on behalf of the company. This enables you to include the individual officers and directors of the company who might have control over the funds in your demand letter," Baird said. "Under the Prompt Payment Act in Texas, the threat of 18% interest accruing per year on the total amount due and owing is a huge incentive for the party you contracted with to settle the claim with you quickly in order to prevent interest from continuing to accrue."

According to Baird, some prompt payment acts will likely include exceptions that accused parties may use in defense of the failure to make timely payments. One exception under current Texas law requires the party you contracted with to have a "good faith dispute" concerning the amount owed, she added. These good faith disputes may come in the form of a claim for defective work or the potential for delays to be assessed by the owner on the project, relating to your performance.

"That being said, it is important to determine if the full amount being withheld is lawful under the statute," Baird said. "In Texas, the contractor is only allowed to withhold 100% of the value of the good faith dispute, meaning that you can negotiate for a partial release of the funds in excess of the disputed amount while you are working to settle the remaining portion of your claim."

That may not be the only obstacle suppliers can face when enforcing prompt payment laws. In fact, higher ups may try to eliminate certain benefits that suppliers can gain through a prompt payment act.

"Many contracts will try to waive interest for failure to make timely payment," Baird said. "In Texas, the statute specifically states that any attempt to waive the prompt payment act is void. It's important to know whether or not your state allows for a contractual waiver of this provision prior to executing the contract so that you don't inadvertently waive your leverage under your state's statute."

Baird's final words of advice on prompt payment laws are:

• As soon as possible, include these statutes in your demand letters.
• Send a notice to individual officers who are liable under the trust fund statute.
• Copy individual officers/directors regarding prompt payment act interest.
• Use both prompt payment laws and construction trust fund statutes in conjunction with lien rights.
• Have an attorney draft a lawsuit with the individual officer's or director's name on it and attach it to a follow up demand.

To learn more about construction trust fund statutes, click here. If you would like more information about the Construction Thought Leadership Discussion Group, contact NACM Education Director Tracey Lerminiaux at This email address is being protected from spambots. You need JavaScript enabled to view it.. The group meets monthly via Zoom to share ideas, network and learn from each other and other experts in the credit industry.

-Bryan Mason, editorial associate