Many states, including Georgia, have enacted laws that delineate the requirements for prompt payment following a project completed by a contractor. These laws protect both the owner who pays for the work and the contractor that does the work. Georgia’s Prompt Payment Act sets forth deadlines for payment and provides rules to guide disputes, late payments and other issues.
The Rights Set Forth In The Act
The Prompt Payment Act lays out two main rights. First, contractors are entitled to payment for their work; the owner who hires a contractor must pay the contractor for the completed work. However, the contractor and any subcontractors must follow the conditions established for the work in a contract between the involved parties, or payment may be denied.
This means that work must be “in accordance with the provisions of the contract.” The contractor, and the owner for whom they complete the work, will both agree to a contract as part of the preliminary discussions prior to starting the project. The contract specifies the information the owner must have in order to make the payment, as well as the work for which the contractor will be paid.
Subcontractors must also abide by any additional conditions established by the contractor. This means that while a contractor is subject only to the conditions established by the owner, any subcontractors hired must follow the conditions of the owner and of the general contractor.
When requesting payment, subcontractors must submit “notice” alongside the payment request. Notice comprises required documentation such as proof that the contractor is requesting payment based on the understanding that the project has been completed. The invoice included must also contain certain information in order to be considered valid, such as the name and address of the contractor and a description of services performed.
Some elements of the prompt payment agreement, such as interest accrual, are lost if notice is not submitted properly. Interest accrual refers to the extra amount an owner must pay to the subcontractor in the event of late payment. The current interest rate is 1% per month, but a subcontractor is not entitled to receive this amount if they fail to provide the documentation explained above.
Timeline For Prompt Payment
The requirements set forth in a prompt payment contract also establish guidelines for the timeline of prompt payment. This timeline ensures that contractors and subcontractors receive the payment they have been promised for their services in a timely manner. The payment deadline for contractors is somewhat different than the timeline for subcontractors, however.
When owners, who are the individual(s) who received the work done whether public or private, pay their contractors, the timeline for prompt payment is a specific number of days; owners must pay contractors within 15 days from receipt of invoice. This means that an electronic funds transfer is made or a check must be written, within 15 days.
The timeline may change if the invoice received by the owner does not include all the required information. The incomplete invoice is then sent back to the contractor, who must provide a proper invoice before payment is received.
When general contractors pay their subcontractors, the timeline requirements are somewhat different because the contractor must first receive payment from the owner before they are able to pay their subcontractors. The payment timer begins, in this case, as soon as the contractor receives their payment from the owner.
The contractor must demonstrate receipt before the payment timer begins. “Receipt” is considered money cleared in a bank account, not just a check in hand. So, while the contractor may receive a check within 15 days, they are not required to pay the subcontractor until the money is available for use in their bank account.
Contractors have 10 days to pay subcontractors. After this, they must pay interest to the subcontractor, just as an owner would be required to pay interest to the contractor after 15 days without payment. The same timeline exists for any subcontractors who have been hired by the first subcontractor. Subcontractors paying other subcontractors have 10 days to make the required payment.
Certain circumstances allow contractors or owners to withhold payments without incurring interest charges. These circumstances often involve some type of violation to the agreements set forth by the contract. One such exception occurs when a job is not performed to a satisfactory, professional standard. If an unbiased third party could testify that the work is substandard, or if the work does not align with the agreements in the contract, payment may be withheld until the issues are resolved.
Additionally, failure of a contractor or subcontractor to make payments in a timely manner can also cause payment problems further down the chain. Since contractors must receive payment from owners before making payments, a delay on the part of one entity may impede the process for others. If, for example, a contractor fails to pay a subcontractor within 10 days, the subcontractor is not required to pay interest to a subcontractor they have hired because the delay in payment is not their fault.
Furthermore, damage caused by a relevant party, such as a contractor or subcontractor, is grounds for withholding payment. This circumstance is similar to the first in that it involves work on the job site. If workers damage the product or property they are working on, the owner may withhold payment until the issue is resolved.
In some circumstances, payment may be withheld if evidence exists, which would be considered reasonable to the average person, that the contract cannot be successfully finished for the monetary balance left unpaid.
Late Payment Penalties
If payments are made after the timeliness guidelines, numerous consequences are possible. These consequences protect contractors and subcontractors by ensuring that these parties receive proper compensation for their services.
The first consequence is interest penalties. Owners, contractors or subcontractors may be required to pay interest on a payment after the payment timeline has elapsed.
The standard rate in Georgia and some other states is 1% per month, which can be a pro rata calculation. Interest cannot accrue if proper notice was not given along with the payment request. Notice, as described above, is any documentation required by the contract between owner and contractor, or contractor and subcontractor, that indicates a balance due.
The involved parties may agree to their own, different payment terms or lower interest rates. Though there is a standard, owners or subcontractors may decide that different terms might suit their agreement better. In this case, contractors or subcontractors must not expect payment according to the standard terms.
If a certain party receives late payment, they may choose to bring the case to court. In this scenario, another consequence that owners or contractors may incur is attorney fees. If the case goes to court, the side in whose favor the judge rules will receive compensation for legal fees. For example, if the judge determines that the owner is at fault for late payment, the owner must pay legal fees to the contractor who has brought the charge against them.
Exceptions To The Georgia Prompt Payment Act
While the Georgia Prompt Payment Act sets the standard for payment agreements between owners and contractors, it may not apply to every scenario. It is important that owners and contractors recognize these exceptions when they enter into agreements with one another.
If other contractual terms are proposed and agreed to by both parties, then the guidelines set by the Act no longer apply. Contract terms negotiated separately are not protected under the Georgia Prompt Payment Act. For example, if parties agree to a different interest rate for late penalties, contractors cannot ask for the interest rate given in the Act.
Oral contract terms are not protected. Contract terms must be in writing, otherwise there will be no proof that a contract exists, and disagreements between parties are more difficult to resolve.
If the size of the project is too small, the Prompt Payment Act may not apply either. The Prompt Payment Act has different requirements for public versus private entities. For public entities, the act does not apply to counties with a population less than 10,000 or municipalities with a population less than 2,500.
For private entities, the act does not apply to projects involving fewer than 13 units. A dwelling unit is “a structure or the part of a structure that is used as a home, residence, or sleeping place by one person who maintains a household.”
When contractors are hired by an owner to complete a job, it is important that both parties agree to their terms of payment, including the timeline by which a payment must be made and the penalties that either side may incur by violating parts of the contract. The Georgia Prompt
Payment act sets guidelines for this scenario, but businesses may choose to agree to different terms as well. In either case, both parties should be aware of the requirements so that they can more easily follow them. An attorney may be able to help you negotiate the terms of such an agreement, or provide counsel if you believe an agreement may have been violated.
Trust The Professionals To Help You Navigate The Legal Requirements Of The PPA
The Georgia Prompt Payment Act seeks to streamline the process for payment and ensure that all parties are protected adequately in terms of compensation; however, not all projects qualify. If you need assistance understanding the PPA in Georgia, the attorneys at KPPB LAW would be glad to help. Contact our professional staff to schedule a consultation.