The New “Prompt Pay” Construction Law Goes Into Effect on November 8, 2010, Expediting Payment and Limiting “Pay if Paid” Clauses

Many construction contracts include “pay if paid” or “pay when paid” provisions, which condition payments to a subcontractor or supplier on payments first being made by the owner. A new “prompt pay” law in Massachusetts limits the use of such provisions on private construction contracts that exceed $3 million dollars (except for residential projects under five units).  The new law goes into effect on november 8, 2010.

The new “prompt pay” law, G.L. c. 149, §29E, also provides time deadlines for processing payment requests: applications for periodic progress payments must be accepted at least every 30 days; approval or rejection must occur within 15 days (otherwise the application shall be deemed approved); and, payment must be made within 45 days of approval. Any rejection of an application must be in writing, explain the basis for the rejection, and be certified as made in good faith. Deadlines are also established for processing change orders. Of course, the specific details of the various provisions are set forth in the statute.

“Pay if paid” or “pay when paid” clauses shall be void and unenforceable unless money is not paid because a subcontractor failed to perform or if the owner becomes insolvent and the contractor is pursuing “all reasonable legal remedies” to obtain payment from the person (e.g. pursing a lien under the Mechanics Lien law). The limitations on conditional payment provisions must be expressly stated in the contract. As a result, owners, contractors, subcontractors and designers should review their standard form contracts to comply with this and other aspects of the new law’s requirements.