It’s January 10, 2023. Have you removed the pay-if-paid provisions in your contracts yet?

In April 2022, Governor Youngkin signed into law SB550, which prohibits the use of pay-if-paid clauses in public and private construction contracts. This represents a sea change in Virginia construction law where the contract was always king. With the change in law, Virginia joined the minority of states (CA, DE, KS, IL, IN, NC, NY, NV, MN, UT, SC, and WI) that prohibit provisions that shift the risk on owner nonpayment to subcontractors.  SB550 went into effect on January 1, 2023, and applies to contracts entered from that date forward. ​

The new law is codified as part of Virginia’s Prompt Payment Act (Va. Code Ann. § 2.2-435) and Virginia’s “wage theft” statute (Va. Code Ann. § 11-4.6). Now, prompt payment is required on both public and private projects and payment by the party contracting with the contractor shall not be a condition precedent to payment to any lower-tier subcontractor. It should be noted the term “subcontractor” excludes persons solely furnishing materials, so the change need not be incorporated into supply contracts. 

Here is what the new law means for you:

State or Local Construction Contracts

• Contracts must contain a clause that obligates the contractor to be liable for the entire amount owed to any subcontractor with whom it contracts.
• Contractor can still withhold payments for nonconforming work or the subcontractor’s noncompliance with the terms of the contract, but contractor must give written notice of intent to withhold and the reason for withholding.
• Prompt payment within seven (7) days is still required.
• Payment by the party contracting with the contractor shall not be a condition precedent to payment to subcontractor(s), regardless of whether contractor receives payment.
• Retainage can still be withheld.
• Interest shall accrue at 1% per month on late payments (and cannot be billed back to the public body).
• The payment provisions must flow down in subcontract agreements.

 
Private Construction Contracts

• The Contract between the owner and the general contractor must contain a clause requiring the owner to pay the general contractor within 60 days of receiving an invoice following “satisfactory completion” of the invoiced work.
• Contracts between a general contractor and a subcontractor shall include a provision making the higher-tier contractor liable for the subcontractor’s duties under the contract.
• A higher-tier contractor shall pay the lower-tier subcontractor within the earlier of (i) 60 days of “satisfactory completion” of the invoiced work or (ii) 7 days after receipt of payment by the owner or higher-tier contractor.
• Contracts must contain a clause that obligates the contractor to be liable for the entire amount owed to any subcontractor with which it contracts.
• Owner and higher-tier contractor can still withhold payments for nonconforming work or noncompliance with the terms of the contract, but they must give written notice of intent to withhold and the reason for withholding.
• Payment by the party contracting with the contractor shall not be a condition precedent to payment to any lower-tier subcontractor, regardless of that contractor receiving payment for amounts owed to that contractor, unless the party contracting with the contractor is insolvent or a debtor in bankruptcy.
• Retainage can still be withheld.
• Interest shall accrue at 1% per month on late payments.

 
For more information, or if you have questions on how Virginia’s new law impacts your current contracts or you want to discuss revisions and modifications to your form contracts, please reach out to Tara Chadbourn or  Jesse Gordon. We are here to help.