New York State Prompt Payment Act – A Positive Development for Contractors

Past due payments are a big problem in the construction sector. Days Sales Outstanding, which is a broad measurement of the time frame in which businesses receive payment for products or services increased to 94 days in 2023 from 90 days in 2022 in the construction industry. These delays in payments make it difficult for contractors to timely pay for labor and material, which ultimately leads to delays in completing projects.

On November 17, 2023, New York State amended its Prompt Payment Act (“Act”), which regulates private commercial construction contracts which exceed $150,000 in New York. The amendments introduced in the Act are generally favorable to construction contractors and will hopefully alleviate the problem of delayed payments within the industry. The Act bestows rights upon construction businesses enabling them to receive timely payments on their contracts. At the same time, it imposes strict deadlines on developers and owners to act or else lose their right to dispute invoices for work performed.

Prior to Amendments

The Act had the following provisions prior to the amendment:

• Owners/developers must approve or disapprove the contractor’s invoice within 12 days of receipt.
• If the owner/developer does not disapprove the invoice by the deadline, payment must be made within 30 days of the deemed approval.
• The owner/developer may disapprove a contractor’s invoice for only specific reasons such as unsatisfactory work progress, defective construction work, disputed work materials, failure to comply with provisions of the contract, and contractor’s failure to make payments for labor.
• Contractor has a right to stop working on the project due to the owner’s failure to make a timely payment of an invoice. The contractor must provide the owner with a 10-day notice.
• Owner may withhold a “reasonable” retainage and must release the funds no later than 30 days after final approval of the work.

Amendments

• Owner may not withhold retainage of more than 5% (previously was a reasonable amount as stated above).
• Contractors may submit a final invoice for full payment upon “substantial completion” of the project. Prior law required final completion of the project. The term “substantial completion” is to be defined in the construction contract. In a standard AIA contract, “substantial completion” is defined as “the stage in the progress of the work when the work or designated portion thereof is sufficiently complete in accordance with the contract documents so that the owner can occupy or utilize the Work for its intended use.”
• When negotiating construction contracts, construction companies should ensure that the term substantial completion is well defined, and they should try to minimize the requirements that entitle them to receive their final payment.
• There is some ambiguity as to whether the Act requires release of retainage upon substantial completion or final completion. This matter will need to be clarified by the Courts.

These recent amendments give construction contractors important rights that can help them avoid potential disputes and costly delays moving forward. It is advised that contractors consult with their advisors on all their New York private construction contracts entered into on or after November 17, 2023, to ensure compliance.

For more information on the Prompt Payment Act, please reach out to Marty Arking, Phillip Ross or your Anchin Relationship Partner.