The Check's in the Mail Paying Your Contractor

State legislation regulating the payment of contractors and allowing the withholding of payment for shoddy or incomplete construction work, was signed into law by Gov. George Pataki and became effective January 15.

The Construction Contracts Act of 2002 applies to private, commercial and residential projects valued in excess of $250,000, but does exclude residential projects of less than 150 units of government subsidized housing or where the aggregate size is less than 9,000 square feet, and two- and three-family residential dwellings. It also doesn't apply to any projects planned or contemplated in the reconstruction of the former World Trade Center site in Lower Manhattan.

According to the bill summary, the legislation establishes provisions requiring the prompt payment of all parties performing work pursuant to a construction contract; allows that the construction contract include all contracts providing for the construction, alteration, repair, maintenance, moving or demolition of a building or structure, and the development or improvement to land; provides for the payment of progress payments on contracts with a duration in excess of 90 days; requires the prompt payment of subcontractors and materials suppliers; authorizes, upon written notice, withholding payment when work is not performed in a satisfactory manner only until defects are corrected; and, provides for suspension or termination of such contracts and any damages that may arise from them.

Following the Rules

The legislation does not permit the withholding of payment in "bad faith" but does allow payments to be withheld only until such time as defective work, late work, disputed work, failure to comply with the contract and failure to pay bills, wages, benefits or taxes, are remedied. The bill also allows levying an interest penalty of one percent a month on late payments.

Provisions in the bill spell out two ways in which the legislation can be applied. Under the first instance, what is called "non-mandatory rules" apply in the absence of an agreement between the parties" concerning a proper payment schedule. For example, the bill sets up default standards for the processing of contractor invoices: namely, the billing cycle for the submission of invoices; the time frame for the owner's approval or disapproval of invoices; the grounds for disapproval of an invoice; the timing of an owner's payments; and the process by which the owner may exercise his or her rights to withhold payment.

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