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The New Massachusetts Construction Prompt Pay Law

Special Thanks

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Proud Corporate Sponsor

PanelistsJohn Romeo, Director, Capital Construction, Boston College

Nancy May, Vice President for Facilities, Northeastern University

Jeff DeMarco, Partner, Campanelli Companies

Charles Buuck, Senior Vice President, Turner Construction

Steve McDonald, President, Erland Construction

Mike Powers, Principal, Symmes Maini & McKee Associates

Deborah Griffin, Partner, Holland & Knight LLP

Robert Lizza, Partner, Hinckley, Allen & Snyder LLP

Tim Bonfatti, President, Compass Project Management

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Brief History Of The Legislation After 1996 lien law reform, ASM pressed for limits

on pay-if-paid

Compromise negotiated between ASM and AGC/Mass passed by Legislature in 2004 – Governor Romney vetoed

2007 ASM added payment processing, change order processing, and right to suspend

Meanwhile, several states pass Prompt Pay statutes

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Brief History Of The Legislation

ASM and AGC working groups met in 2008 and 2009

April 2010: ASM filed new, streamlined bill

July 8, 2010: House passed ASM bill

July 2010: AGC and ASM negotiated revisions following which AGC voted to “not oppose” amended bill

July 31, 2010 Senate passes amended bill; August 10, 2010 Governor Patrick signs into law

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Contracts Affected Statute takes effect November 8, 2010

Applies to prime contracts signed on or after November 8, 2010 - Owners as well as contractors and subcontractors affected

Applies to all subcontracts of any tier under those prime contracts

Applies to all projects with prime contracts with an original value of $3 million or more, but not residential projects of 1-4 units

All contracts, subcontracts, purchase orders eligible for rights under Mass. lien law, Ch. 254

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Law Addresses Five Main Issues In Payment Process

1. Limit on time for submission, review, and payment of requisitions

2. Limit on time for review and approval of change orders that increase the contract price

3. Effective prohibition of “pay-if-paid” clauses in subcontracts with two limited exceptions

4. Delayed dispute resolution process for rejection of requisitions and changes

5. Limit on forced continuation of work more than 30 days beyond due date of undisputed payment

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Payment Process: c. 149, §29E(c)Every contract must provide reasonable timeperiods for submission, review and payment ofapplications for payment

“Reasonable” cannot exceed: Submission: 30 day limit on billing

intervals Review: Approval or rejection, in whole

or in part, within 15 days (7 days added to at each tier below the Owner)

Payment: 45 days from approval

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Payment Process: c. 149, §29E(c)

Approval or Rejection Deadlines Can be no more than 15 days after submission for

action by owner Deadline for each tier below owner is 7 days

longer than for next tier above Must either approve or reject pay application, in

whole or in part Billing is “deemed” automatically approved if not

rejected by deadline Approval starts time interval for payment

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Payment Process: c. 149, §29E(c)

Rejection of pay applications: Must be in writing Must explain “factual and contractual basis for

the rejection and must be certified as made in good faith”

No specified grounds for rejection in statute, so long as good faith basis

Contract, not statute, governs grounds for rejection

“Deemed” approval can be reversed by actual rejection per statute any time up to payment deadline

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Change Orders: c. 149, §29E(d) Contract must state reasonable time period for

approval or rejection of any written request for price increase - cannot exceed 30 days

Time to approve or reject commences later of: submission of written request or start of performance of the extra work

Inaction by deadline is “deemed” approval Rejection can be for any contractually valid reason Rejection must be in writing, explain the factual and

contractual basis for the rejection, and be certified as made in good faith

Additional compensation can be billed in next regular pay application after approval

“Deemed” approval can be undone by rejection of change request before payment deadline

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Pay-if-Paid: c. 149, §29E(e) Pay-if-Pay clause unenforceable except in

two narrow circumstances, which must be expressly stated in subcontract:

Non-performance by party seeking payment Person seeking payment must have been given

notice and opportunity to cure in accordance with contractual cure provisions, or 14 days if silent

Insolvency of third-party payor if upper tier payor is or becomes insolvent within 90

days Notice of Contract filed before submitting first pay

application for on-site work Payor must diligently pursue all other reasonable

collection rights and remedies unless fruitless

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Right to Seek Dispute Resolution

C. 149, §29E (c) and (d) limit contract provisions that require disputes for payment and changes to be reserved until end of project

Maximum mandatory delay or waiting period for commencing dispute resolution process is 60 days after rejection

Restriction applies ONLY to disputes over rejection of pay applications and rejections of additional compensation for changes

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Right to Suspend Work for Overdue Payment: c. 149, §29E(f) Limits contract clauses requiring continued

performance despite nonpayment of undisputed requisitions

Provides statutory right to suspend work if approved payment over 30 days past due, unless non-payment is due to: Dispute over quality or quantity of the work or Default by the claimant after approval of the

overdue payment Exception available only where there is prior written

notice of the dispute or default and payment of all undisputed amounts

Key Issues that Impact the Owner-CM Relationship The Application for Payment Cycle

Change Order Processing

Contractors Protecting a “Pay-If-Paid” Clause

The Payment Cycle

The Subcontractors’ Bargain:Traded certainty of eventually being paid (i.e., no “paid-if-paid”) for extended commercial terms

22 days to approve at first tier 45 days for payment after approval 30 days to stop work for non-payment Total: 97 days from submission of pay

application

The Payment Cycle Impact on Subcontractor-Vendor

RelationshipFor lower tiered subs and suppliers the periods

are longer (7 days each tier)But, suppliers and manufactures are not likely to

be willing to change their commercial terms, e.g. “30 days net”

Will Owners adopt the PPA payment cycle as the new standard of “reasonableness?”

Will Subcontractors get squeezed between traditional vendors terms and the longer PPA payment cycle?

Change Order Processing Subcontractor Goal: To move the paper

Approval or rejection required w/in 30 daysAccess to dispute resolutionBilling in advance of formal change

But, many changes can be complex, involve multiple trades, and take months or longer to resolve.

Does the PPA disrupt productive change order management?

Does the PPA merely force project managers at all tiers to “do their job?”

Will large complex changes be broken up into smaller parts to meet PPA obligations?

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Protecting a Pay-if-Paid Clause Potential increase in lien filings prior to

submittal of initial applications for payment Increased pressure on upper tier payors to

bond off or otherwise discharge lower tier lien filings

Increased use of lien prevention bonds Payor parties of any tier must balance

desire to retain limited “pay-if-paid” benefits against impact on client relations

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Prompt Pay Best PracticesFrom Designer 1. Focus on pre-construction partnering meetings to set

designer/contractor/owner expectations for payment schedule,

review and approval.

2. Keep performing the comprehensive review of the “Pencil” monthly

requisition with the Contractor prior to submission of formal monthly

requisition.

3. Prioritize cost/schedule sensitive change requests as part of the

Change Order Review Process.

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Prompt Pay Best PracticesFrom Owner 1. Reconsider when to start a Change Order? May tend to start them with

T&M at first

2. New contract language with GC

3. Pay closer attention to when invoices must be paid and who the ball is

with

4. Revise boilerplate contract language to include in RFPs when we go out

initially to bid capital projects

5. Consider the advantage/disadvantage of using the same boilerplate for

all projects, rather than differentiate at the $3 million threshold

6. Make sure the architect/design team is on board with a detailed process

for reviewing and approving change orders and make it mandatory for

discussion with the CM/GC at the beginning of every capital project

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Prompt Pay Best PracticesFrom CM 1. Modify construction contract

2. Train Finance department

3. Train Project managers

4. Know the impact of the Prompt Pay Bill and educate your project

personnel-read, attend seminars, bring in legal counsel for training

5. Review and modify contract language (Owner Contracts & Sub

Contracts)

6. Prequalify all parties for financial capabilities (Owners, GC’s and Subs)

7. GC’s and Subs – Develop a corporate policy regarding filing Notices of

Contract

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The New Massachusetts Construction Prompt Pay Law