A new law that became effective in Massachusetts on November 8, 2010, makes Massachusetts part of a growing majority of states that regulate various aspects of the payment process for construction services on private projects. Known as the “Prompt Pay Act,” and codified at Mass. Gen. Law c. 149, § 29E, the Act applies to all private construction projects that exceed $3 million in value, except for residential projects of four or less units. The Act establishes strict maximum timelines for review and action upon a contractor’s applications for payment and the making of payment, as well as for review and action upon proposed change orders. Project owners are now required to process payment applications no less than once per month and must make payment within 45 days of receipt of a complete application for payment. Payment applications not acted upon (e.g., either approved or rejected) may be considered presumptively approved.
Requests for increases in the contract sum and the contract time (i.e., proposed change orders) are also subject to strict new timelines. Such requests must now be approved or rejected within 30 days of submission or commencement of the work that is the subject of the request. As is the case with monthly payment applications, a contractor is entitled to consider its request presumptively approved, and eligible for inclusion in the next monthly payment application, if the owner fails to take appropriate action on the request within the 30 day timeframe.
The Act also seeks to establish performance standards for the review of payment applications and change order requests tasks that are typically delegated to an owner's architect or engineer. Persons reviewing such documents are now required by law to include an “explanation of the factual and contractual basis” for any part of a payment application or proposed change order that is rejected. Further, all such rejections must include a certification as having been made in good faith. The Act also broadly limits the use of “pay-if-paid” and “pay-whenpaid” clauses, which have been commonly used by contractors to limit exposure to economic risks in the event of delayed payment by their clients or upper-tier contractors. Now, such conditional clauses are void and unenforceable, unless (1) the party withholding payment did not pay due to a failure of performance by the lowertiered contractor or supplier and the entity did not cure its failure timely; or (2) the party withholding payment becomes insolvent and the party attempting to enforce the conditional payment provision has (i) filed a notice of contract under the mechanics' lien law prior to the submission of its first payment requisition; (ii) filed a statement of account and commenced a superior court action within the timeframes permitted by the mechanics' lien law; and (iii) employed all reasonable legal remedies to obtain payment.
Continuing contract performance terms are also limited in the Act. Contract provisions that require contractors to continue performance if payment of approved sums is not made more than 30 days after the due date, are now void and unenforceable unless there is a dispute regarding the quality of construction performed or the contractor has defaulted under the contract.
The Prompt Payment Act will require project owners, architects, contractors, and subcontractors to revisit their standard contract clauses and conform legal documents and business practices with the Act.