Contractors, and particularly subcontractors, face the risk of nonpayment on virtually every project they take on. Even when the owner of a project is financially reliable, such as the U.S. government, red tape and contractual provisions may lead to payment delays. To address this issue, and ensure contractors are willing to work for the government, many states like Washington provide statutory protections addressing payment.
However, the reach and scope of statutory payment protections are limited, and contractors should ensure they understand whether their rights are secured. Without necessary safeguards, contractors may be faced with a legal battle in court and a contractual interpretation which may not ultimately be to their liking.
Subcontractors face additional difficulties. For example, while most subcontractors prefer to be paid upon completion, prime contractors usually attempt to defer payment until they are paid by the property owner. Additionally, fine-print contract clauses, which are frequently ignored (or stomached) at signing, tend to be strictly construed. That is, they are given their literal meaning by courts even if seemingly harsh or unfair.
Given this background, Washington contractors should keep the following dichotomy in mind.
Public Projects and The Washington Prompt Payment Act
The Washington Prompt Payment Act (“WPPA”) mandates payment timelines for work completed by contractors. However, the WPPA’s prompt payment protections only apply to public works projects commissioned by either: (1) the state, (2) a municipality, (3) a school district, or (4) some other Washington public body.
Under the WPPA, a public entity must pay the prime contractor within 30 days of the later of either: (a) the date the prime contractor’s invoice is received; or, (b) the date of receipt of the labor or materials.
Within 10 days of payment from the owner, prime contractors are then required to pay their subcontractors and suppliers. Thus, subcontractors should expect payment within approximately 40 days of completion.
Private Projects and Contractual Payment Provisions
For private contracts, such as one involving a prime contractor and a homeowner, the contract, as well as Washington caselaw, will govern. The most typical payment timing provisions in construction contracts are the “Pay-if-paid” clause and “Pay-when-Paid” clause.
As the name implies, the “Pay-if-paid” clause effectively states that a subcontractor will only be paid if the prime contractor is paid by the owner. Under this provision, a subcontractor could find itself in difficult circumstances if the owner defaults on its obligation to pay the prime contractor or refuses to pay due to defects. As such, subcontractors usually dislike this clause, while prime contractors tend to prefer it.
On the other hand, a “Pay-when-Paid” clause dictates that a subcontractor will be paid at a certain time, regardless of whether the owner ever pays the prime contractor. Thus, the subcontractor’s payment is not contingent upon a prime contractor’s payment from the owner. This provision is generally favored by subcontractors because it shifts the risk of the owner’s default to the prime contractor, who is typically in a better position to assess the risk of nonpayment.
Summary & Tips for Future Projects
Washington provides limited statutory protection securing prompt payment on public projects. However, private contracts are afforded no such protection. During the negotiation of construction agreements, contractors at all tiers should understand their payment rights and obligations in the event of an owner’s default. If these risks cannot be mitigated by modifications to the agreement, contractors should carefully assess the default risk of the property owner and whether the project is worth taking on.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.
Cotney Construction Law is an advocate for the roofing industry and General Counsel of RCAW, WSRCA, and NRCA. For more information, contact the author at 866.303.5868 or go to www.cotneycl.com.