If there is one thing every construction company wants to know it’s this…when am I going to be paid? Many states have enacted what are commonly known as “prompt payment” laws, and Kansas and Missouri have them. In fact, Kansas and Missouri each have two prompt payment laws, one set for public projects (i.e. funded by tax payer dollars) and another set for private projects. Both sets are for commercial construction only; there are no prompt payment laws for non-commercial construction at the present time. In the following article I provide for you the major points to be taken from the Kansas and Missouri Prompt Payment Acts. But before you get too excited about your rights under the Acts you must know Commandment #1: “Thou Shall Know Thy Contract.”
What I mean by this is simple. All of the Kansas and Missouri Prompt Payment Acts do not, let me repeat, DO NOT alter the payment terms agreed to between the parties in the contract. All four statutes, say the payment terms “shall be pursuant to the terms of the contract” or something to that effect. So if you have a legally enforceable “pay when” or “pay if” paid clause, then you will have to abide by that term in the contract. Nothing in the Prompt Payment statutes provide any relief from such a clause. “Pay when” and “pay if” clauses are prevalent in almost all commercial construction subcontracts and are not the subject of this newsletter (note to self for future article subject matter). Just remember as you negotiate your contracts that, even though these clauses are not favorably looked upon by the Courts, they are enforceable if properly written. So now you know why Commandment #1 is “Thou Shall Know Thy contract,” because, “The Courts Shall Enforce Thy Contract!” So, what do the Kansas and Missouri prompt payment acts cover? The following are bullet points of the laws:
Kansas Fairness in Private Construction Contract Act (KSA §§16-1801 et seq.):
- Terms of the Act cannot be waived by contract
- Covers all types of commercial construction
- Does not cover single family or multi-family residential housing of 4 units or less
- Payment must be made per contract terms
- Contract terms cannot waive right to resolve disputes through litigation (but may instead require arbitration)
- Contract terms cannot waive right to file lien (but may require lien release in consideration for payment)
- “Pay when” or “Pay if” clauses not allowed as defense of Mechanic Lien claim or Payment Bond claim
- Owners must pay contractor within 30 days of receipt of proper, undisputed request for payment
- Owner shall pay 18% per annum interest on the late, undisputed amount
- Contractor must pay subcontractor within 7 days of receipt of payment from Owner on undisputed amounts
- Contractor must pay subcontractor 18% interest per annum on late, undisputed amounts
- Subcontractor must likewise pay sub-subcontractors within 7 days of receipt, subject to 18% interest per annum on late payments of undisputed amounts
- Retainage shall not exceed 10%
- Payment of retainage also must be made pursuant to the terms of the contract or within 7 days after receipt, subject to 18% per annum interest
- If any undisputed payment is not made within 7 business days, contractor or subcontractor, regardless of tier, may suspend performance of the work upon seven additional day’s written notice
- If work is rightfully suspended as described above, party affected by the suspension is entitled to a time extension and increase in contract sum for reasonable costs of demobilization, delay and remobilization
- Venue for litigation or arbitration hearings shall be in the county where the project is located
- In any litigation or arbitration to enforce the payment laws, the court or arbitrator “shall” award costs and reasonable attorney fees to the prevailing party
Kansas Fairness in Public Construction Contract Act (KSA §§16-1901 et seq.):
- Same as Private Construction Act EXCEPT it basically only covers buildings (i.e. not roads, highways or bridges)
- Owner must pay within 30 days unless there are “extenuating circumstances”, and even then within 45 days (note: “extenuating circumstances is not defined)
- “substantial completion” is defined (not so in the private act), and Owners must release retainage within 30 days of substantial completion, subject to the 18% per annum interest
- Early completing subcontractors “may” be paid retainage prior to substantial completion, but it is not mandatory
Missouri Private Construction Contracts Prompt Payment: (RSMo § 431.180):
- Payments must be made in accordance with contract terms
- In an action to collect payment the Court or Arbitrator may require the award interest at a rate up to 1.5% per month (note…the Court has the discretion whether or not to award this enhanced interest rate)
- In an action to collect payment the Court or Arbitrator may award reasonable attorney fees to the prevailing party (again note the Court has the discretion whether to award attorney fees)
Missouri Public Works Contracts Prompt Payment (RSMo § 34.057):
- All contracts issued by public body must include the language requiring “prompt payment”
- Payment must be made to contractor at least monthly by public owner (unless a lump sum contract stipulates a lump sum payment)
- Payment is to be made to the contractor by the public owner within 30 days of approval
- Architect/Engineer is the responsible party to approve pay applications each month
- Retainage is to be no more than five percent unless the architect or engineer determine a higher amount (not to exceed 10%) is required to ensure performance
- Early release of retainage is allowed but not mandatory
- Payment of retainage shall be made by public owner to contractor within 30 days of substantial completion subject to completion of all project close out requirements
- If there is any punchlist work remaining, the public owner shall hold back a sum of 200% of the value of the remaining work to be completed
- Owner shall pay 1.5% interest per month interest on late payments
- Contractor retainage held on subcontractors cannot exceed 10%
- Upon receipt of payment that is applicable to the work performed by a subcontractor, the contractor shall pay the subcontractor in “proportion” to the amount the contractor received for the subcontractor’s work
- Unless there is “reasonable cause,” the contractor must pay the subcontractor within 15 days of receipt of payment from the public owner subject to 1.5% per month interest for late payments
- The above general rule applies to all tiers of contractors, subcontractors, sub-subcontractors, etc.
- Contractor is not to bill the owner for the work of the subcontractor if contractor has a dispute with the subcontractor and does not plan to pay the subcontractor upon receipt of payment from the public owner
- If the contractor receives a payment and subsequently determines he is not going to pay the subcontractor due to a number of reasons/disputes stipulated in the statute, then the contractor must credit the amount back to the public owner on its subsequent application for payment
As you can see there are similarities but also big differences in the laws between Kansas and Missouri, and I can assure you there are likewise big differences in the state where you may be located. But the important thing to know is that, more than likely, if you’re a commercial construction company you probably have rights under the laws in your state regarding when you can and should expect to be paid…and the consequences if you are not. The very best advice I can and will leave you with is two-fold. First, remember that at least in Kansas and Missouri, whatever you agree to in the contract is going to govern your payment process. Second, find a good construction lawyer and get some help and advice no only when you’re having problems getting paid, but on the front end…during contract negotiations. It may cost you a little bit of money to get the advice on the front end, but it may save you many times that amount on the back end if a payment problem can be avoided altogether.