Massachusetts laws help to ensure that companies that provide construction services are paid promptly. One of these laws may catch owners and developers out if they are not aware of its consequences. This is the Prompt Pay Act which sets a deadline for payments to be made to subcontractors, contractors and suppliers of construction materials once a request for payment has been sent. Failure to respond to the payment request in a timely manner may result in the obligation for the amount requested to be paid. It is important that if you or your company has existing construction contracts you become familiar with the consequences of the Prompt Pay Act to avoid what has been colloquially called the “Deemed Approved” trap.
Why is it called the “Deemed Approved” trap?
The Prompt Pay Act requires the recipient of a payment request from a service provider of construction services to respond to the request within 15 days. The response doesn’t have to be an approval of the payment amount itself, but must either be a payment or a rejection of the payment pending communication with the contractor, sub-contractor or supplier of construction materials. For example, if you are not happy with the work so far or the completion schedule you can notify whoever sent you the payment request, but it must be done within 15 days or it is “deemed” that the payment amount has been approved and therefore means that payment must legally be bound to be paid.
Failure to respond, whether by an approval or a rejection of the payment application, means that you must make payment within the next 45 days or face legal action by the service provider. Basically, if you are the owner of the project or the developer you must make yourself aware of the provisions within the Prompt Pay Act as it applies to prompt response to payment requests or face the legal consequences.
The Prompt Pay Act
The Prompt Pay Act is codified at Massachusetts General Laws Chapter 149, Section 29E. The Act applies only to construction contracts worth more than 3 million dollars and is designed to stop owners or developers delaying payment to construction service providers when work has been completed partially or fully and the contract explicitly states that a part or full payment has been agreed to at this stage.
The Act not only specifies the time limits expected to be kept to with regard to a response to a payment request it also specifies how a rejection of the payment request must be made.
As has already been mentioned, when a payment application has been received, the recipient must approve or reject the application in writing within 15 days of the payment application. If the payment request is approved, full payment of the amount requested must then be made within a further 45 days. If no response is made for whatever reason, the payment request will be deemed “approved” and payment must be made within the next 45 days.
If there is a dispute about the amount of payment or the work so far completed, then the response must:
- be made in writing;
- be made within 15 days of receipt of the payment application;
- provide a comprehensive reason why the request for payment is rejected;
- specify the amount that is not going to be paid until the reason for the rejection is resolved.
Common ways that a project owner or developer can fall into the “Deemed Approved” trap
The following are typical ways that a project owner or developer can fall into the “Deemed Approved” trap:
1. Failure to keep to the 15 day deadline for a response
The Prompt Pay Act does not allow for any excuses why a response, whether approval or rejection, cannot be made within the 15 day deadline. Efficient procedures for responding to communication and payment requests can help to avoid such requests not being addressed, e.g. it was burrowed amidst a backlog of emails that have piled up without being read.
2. Failure to provide specific reasons why the payment request has been rejected
The Prompt pay Act does not allow recipients of payment requests to give vague reasons why payment has not been approved, such as an email back to the sender stating that the work was unsatisfactory or without going into details why it was considered unsatisfactory.
3. Failure to keep to contractual procedures
Failure to respond to the payment request may be due to confusion about who in project management has been designated in a contract to respond in a timely manner to such requests, leading to a delay in a response or no response at all.
4. Failure to approve the full payment amount without giving a reason
Just paying part of the amount requested without giving a specific reason why the remaining amount has been withheld as required by the Prompt Pay Act will lead to the response being rejected itself and the payment request “Deemed Approved”.
Seek legal advice if involved in a Deemed Approved dispute
The “Deemed Approved” trap can normally be avoided through efficient procedures, responding to payment requests on time and providing appropriate responses according to the conditions imposed by the Prompt Pay Act. If you, as the owner or project manager have become involved in a dispute over payment applications, and face litigation you should contact a construction attorney in Boston for legal advice over your options.