Many jurisdictions have enacted legislation in various forms designed to assure, or at least encourage, prompt payment of persons providing labor materials and services to construction projects. In Georgia, these come in several forms. Relative to work performed and materials and services provided to federal public works projects, the Federal Prompt Payment Act affords a wide range of requirements and protections to assure timely payment flow. On all other non-federal construction projects in Georgia, several Georgia statutory schemes provide similar forms of protection of payment flow. This article will focus upon the Georgia statutory provisions.
Georgia Prompt Payment Act – Rights, Remedies and Recourse for Untimely Payment for Construction Labor, Materials, Work or Services
The Georgia “Prompt Payment Act” is applicable to most public and private construction projects in Georgia. It applies to payment flow to contractors, subcontractors and materialmen. In fact, it specifically provides that contractors and subcontractors (including materialmen) performing “in accordance with the provisions of his or her contract and satisfaction of the conditions of his or her contract precedent to payment entitles such person to payment.”
However, certain elements of the Act’s protections and assurances can be negated and superseded by more specific provisions of the payment procedures and processes required for “retainage” and final payment on PUBLIC PROJECTS as discussed below in Subpart 2…
Payment Timing (other than retainage withholding and release):
Regarding the “prime” contractor, the Act provides that an owner shall pay the prime contractor for both progress and final payment, upon proper performance, within 15 days of receipt of payment request based on “work completed or service provided”. For all subcontractors (including “materialmen”) performing in accordance with the provisions of their subcontract, and upon satisfaction of “the subcontract conditions precedent,” the Act requires that the upper tier contractor (or subcontractor) shall pay its subcontractor (or materialman) the “full amount received for such subcontractor’s work and materials based on work completed or service provided under the subcontract,” upon such proper performance, within ten (10) days of receipt by the contractor of corresponding payment (both progress and final). However, such “contractor” is allowed “in his or her reasonable discretion” to require from the subcontractor “satisfactory reasonable assurances of continued performance and financial responsibility to complete” the work, “including but not limited to a payment and performance bond”.
Interestingly, the satisfaction of contractual “conditions precedent” and proviso requiring “reasonable assurances of continued performance” relative to timely payment for work performed only apply at the subcontract level. Moreover, this statutory payment flow process gives full effect to the “contingent payment” or “pay–when-and-if-paid” concept at the subcontract levels in keying payment obligation and timing to receipt of corresponding payment by the contractor.
Retainage and Withholdings:
Under theprime contract, an owner may withhold a “reasonable amount for retainage” but not exceeding the “retainage percentage set forth in the contract between the contractor and the owner.” Additionally, an owner is not prevented by the Act from “withholding payment to its contractor because of the following”:
a. Unsatisfactory job progress
b. Defective construction which has not been remedied;
c. Disputed work;
d. Third-party claims filed or reasonable evidence that a claim will be filed;
e. Failure of contractor (or its subcontractor) to make timely payments for labor , equipment and materials;
f. Damage caused by contractor to the owner, other contractors, or subcontractors; or.
g. Reasonable evidence that the work cannot be completed for the unpaid balance of the contract sum.
Under subcontracts, a prime contractor (or upper tier subcontractor) may also withhold a “reasonable amount for retainage” provided that the retainage withheld “shall not exceed the percentage retained from the contractor by the owner on account of the subcontractor’s work.” Additionally, a contractor (or upper tier subcontractor) is not prevented by this Act from “withholding payment to its contractor because of” the same factors applicable to a prime contract (as listed above).
There are no provisions in the Act prescribing automatic reduction of the rate of retainage or release by the owner of retainage (or other withholdings) based upon the stage of completion or satisfactory progress. (But see Public Works statutes discussed below). However, contractor must “pass through” released retainage funds from owner – within ten days of the contractor’s receipt of retainage or withholdings from the owner, corresponding to the subcontractors, thereby reducing each subcontractor’s retainage in” the same manner as the contractor’s retainage is reduced by the owner,” provided that:
a. the value of the subcontractors work completed and in place equals 50 % of the subcontract value;
b. The Work of the subcontractor is proceeding satisfactorily;
c. subcontractor has provided or provides such “satisfactory reasonable assurances of continued performance and financial responsibilityto complete” as the contractor “in his or her reasonable discretion” including but not limited to a “payment and performance bond”.
Again the rigorous statutory conditions and limitations upon pass through of any reduction of retainage apply only at the subcontract tiers.Interest on Late Payments:If a periodic or final payment to a prime contractor is delayed by more than 15 days or if a periodic or final payment to a subcontractor (ormaterialman) is delayed more than ten days after receipt of periodic or final payment by the contractor or upper tier subcontractor, “the owner, contractor, or subcontractor, as the case may be, shall pay his or her contractor or subcontractor interest, beginning on the day following the due date, at the rate of 1 percent per month or a pro rata fraction thereof on the unpaid balance as may be due.” However, this entitlement to recover interest on late payment under this statute is dependent upon three important conditions”
First: ADVANCE NOTICE REQUIRED! The Act specifically states that “no interest is due unless the person being charged interest has been notified of the provision of this Code section at the time the request for payment is made.”
ACTION ITEM: include on all applications for payments, statements or invoices by imprint or stamp the following:
“This Request for payment is submitted pursuant to and in accordance with the terms of Georgia Code § 13-11-7 requiring that all payments not made within ____ days [15– for prime contract / 10– for subcontract] after same became due shall bear interest at the rate of 1 percent (1%) per month until paid. And any action to enforce this requirement shall include demand for attorneys’ fees under the Act.”
Second: The Act provides that “[a]cceptance of progress payments or final payment (without accompanying interest) shall release all claims for interest on said payments”.
ACTION ITEM: WATCH OUT: If an interest penalty is due under the Act, one cannot accept payment of the principal amount due and still preserve entitlement to the accrued interest.
Third: And most critically. The Act provides that “[n]othing in this chapter shall prohibit owners, contractors, and subcontractors from agreeing by contract to rates of interest, payment periods, and contract and subcontract terms different from those stipulated in this Code section, and in this event, these contractual provisions shall control.” Owners, contractors or subcontractors may agree “by contract” to rates of interest, payment periods, and contract and subcontract terms different from those specified!! And such differing terms shall override and supersede the statutory terms.
BUT, even then, it is provided that “[i]n case of a willful breach of the contract provisions as to the time of payment, the interest rate specified in this Code section shall apply.”
In contract formation be wary and avoid inclusion of contract provisions that would contradict or conflict with any of the protections afforded by the Act – and negate the beneficial effects of the Act.
Attorney’s Fees to Prevailing Party:
The Act provides that in an action to enforce a claim under the Act, the “prevailing party is entitled to recover reasonable attorney’s fees” for the services of its attorney including but not limited to trial and appeal and arbitration, in an amount to be determined by the court or the arbitrators, as the case may be.
Interestingly, it does not appear that the attorneys’ fees entitlement under this section of the Act is subject to revision or elimination by contrary contractual provisions, although the entitlement is explicitly related only to claims asserted under b of this Act
Georgia Public Works Payment Procedures and Limitations
Regarding Georgia state and local public works projects, there are additional special provisions governing payment flow, timing and retainage that overlay upon or superseded the Georgia Prompt Payment Act. These payment procedure and limitations apply to most public construction in Georgia (they do not apply to GDOT road and highway projects, projects with value of less than $150,000 or duration of less than 45 days, or “water and sewer” projects).
The statute prescribed that progress or interim payments must be made on “some periodic basis, and at least monthly, based on the value of the work” and must “include the value of “stored materials and equipment” suitably stored, insured and protected on the project site and off the project site if approved in advance.
Retainage and Withholdings:
Otherwise, the focus of this statutory scheme in on retainage and withholdings. Under prime contract, an owner may withhold retainage up to a maximum of 10 percent of each progress payment “reasonable amount for retainage” not exceeding the retainage specified in the contract retainage. However, when 50 % of the contract value is due the “owner shall withhold no more retainage” but only if the manner of completion if the contract work and its progress are “reasonably satisfactory” to the owner. Retainage can be restored and resumed if work is later unsatisfactory or behind schedule
At the discretion of the owner and approval of the contractor, the retainage of each subcontractor may be released separately on a line item release basis as each subcontractor completes its work.