Virginia Law Prohibits Pay-if-Paid Clauses in Most Construction ContractsAugust 30th, 2022 | Category: Industry News
A bill to shore up payment protections in the construction and glazing industry in Virginia has been signed into law.
Senate Bill 550 was signed into law in April by Virginia Governor Glenn Youngkin. The bill amended a portion of the Virginia Prompt Payment Act and a component of the Virginia wage theft statute.
The amendments prohibit pay-if-paid clauses in both private and public construction contracts in Virginia. The changes will go into effect on all new construction contracts entered into on or after Jan. 1, 2023.
A pay-if-paid clause states that a general contractor is obligated to pay a subcontractor only if the owner pays the general contractor. This means that if the general contractor doesn’t get paid, neither do any subcontractors. The clause is all about who ultimately bears the risk of owner nonpayment. It shifts financial risk from the owner to the parties beneath them.
A pay-when-paid clause is a timing mechanism for payment. It states that the contractor will pay the subcontractor within a certain amount of time after receiving payment from the owner.
General contractors or higher-tier subcontractors could wait to pay their subcontractors until they received payment for the job from the owner. This shifts the risk to the lower-tier subcontractors, as the receipt of payment from the owner or upper-tier contractor was a condition precedent to any duty to pay the lower-tier.
Once the new law takes effect in January 2023, only pay-when-paid clauses will be enforceable. The law will make a maximum required 60-day provision for payment, making it mandatory for all project owners to pay their contractors within a 60-day timeframe. Lower subcontracts will also require that all contractors pay their subcontractors within the “earlier of sixty (60) days after their subcontractor’s invoice submittal or seven days after the receipt of the amount paid by the owner or higher-tier contractor.”
The failure to make timely payments by these new prompt payment rules will result in interest penalties accruing at a rate equal to the prime rate. The interest begins to accrue on all amounts that remain unpaid after seven days from when the payment was due, as reported by the Wall Street Journal.
The 60-day payment requirement does not apply to public bodies that are not defined as an owner in the legislation. The legislation defines an owner as a person or entity, other than a public body as defined in § 2.2-4301, responsible for contracting with a general contractor for the procurement of a construction contract.