New Mass Law Affects Construction Contracts

Massachusetts has adopted laws that effectively end "payifpaid" clauses in construction contracts and establish strict deadlines on payment schedules.

The "prompt pay bill" goes into effect in November and changes the payment responsibilities of parties in most largescale commercial and residential construction projects. The law severely restricts the ability of owners and general contractors to use a payifpaid clause to withhold payment from subcontractors and suppliers.

The law brings several changes to contracts for projects with price tags of $3 million or more and at least five dwelling units. It requires expedient decisions on the approval or rejection of regular payments and change orders, restricts the use of payifpaid provisions, and allows contractors to cease work for nonpayment.

Even if a project does not meet the law's qualifications, contractors can still incorporate language from the law into their contracts, and any party who violates the agreement could face a breach of contract action.

Before this law, general contractors could withhold payments to subcontractors and the subs could refuse to pay suppliers if a project owner stopped paying.

The law only allows general contractors to use payifpaid in two circumstances, (1) if a subcontractor's work is deemed defective or (2) if an owner becomes insolvent after the general contractor put a mechanic's lien on the project. If any part of a payment application is rejected, the general contractor must set forth in detail reasons for the rejection. If no action has been taken on a payment request after 15 days, it is deemed approved.

General contractors who do not file liens will be open to the risk of having to pay subcontractors even if the owner runs out of money. General contractors do not always put liens on projects fearing it will affect their relationship with the owner. This new risk might change that. It also means lenders will have to figure out how to deal with the fact that the general contractor has a new need for a lien.

The best protection for general contractors is to increase prequalification efforts and standards both for subcontractors and the owners.