Prior to Amendments

The Act had the following provisions prior to the amendment:

• Owners/developers must approve or disapprove the contractor’s invoice within 12 days of receipt.
• If the owner/developer does not disapprove the invoice by the deadline, payment must be made within 30 days of the deemed approval.
• The owner/developer may disapprove a contractor’s invoice for only specific reasons, such as unsatisfactory work progress, defective construction work, disputed work materials, failure to comply with provisions of the contract and contractor’s failure to make payments for labor.
• The contractor has a right to stop working on the project due to the owner’s failure to make a timely payment of an invoice. The contractor must provide the owner with a 10-day notice.
• Owner may withhold a “reasonable” retainage and must release the funds no later than 30 days after final approval of the work.

Amendments

• The owner may not withhold retainage of more than 5% (previously was reasonable amount as stated above).
• Contractors may submit a final invoice for full payment upon “substantial completion” of the project. Prior law required final completion of the project.

The term “substantial completion” is to be defined in the construction contract. In a standard AIA contract, “substantial completion” is defined as “the stage in the progress of the work when the work or designated portion thereof is sufficiently complete in accordance with the contract documents so that the owner can occupy or utilize the work for its intended use.”

When negotiating construction contracts, construction companies should ensure that the term substantial completion is well defined, and they should try to minimize the requirements that entitle them to receive their final payment.

There is some ambiguity whether the Act requires release of retainage upon substantial completion or final completion. This matter will need to be clarified by the courts.

Late payments are a big problem in the construction sector. Days Sales Outstanding, which is a national measurement of the time frame in which businesses in the construction industry receive payment for products or services, increased four days in 2023, to 94 days, from 90 days in 2022.

These delays in payments make it difficult for contractors to make timely payments for labor and material, which ultimately lead to delays in completing projects. The amendments to the Act will hopefully alleviate this problem.

About the author: Phillip Ross, CPA, CGMA is an Accounting and Audit Partner and Chair of the Construction Industry Group at Anchin, Block & Anchin, LLP. For more construction industry thought leadership and content, log on to www.anchin.com.