What must engineers consider about prompt pay statutes?

By Michael C. Loulakis, Lauren P. McLaughlin, and Ashley P. Cullinan

Economic indicators in 2024, such as inflation, interest rates, and construction spending, generally point to a strong U.S. economy. Yet, other metrics, including slowness in the growth of gross domestic product and marginal decreases in construction spending, give pause. Add in a presidential election cycle, and one thing is assured: the perception of economic uncertainty.

Irrespective of what is happening at the macro level, all business owners know that at the heart of economic success for any company is prompt payment. While the U.S. Chamber of Commerce recently asked large companies to take a so-called Prompt Pay Pledge, design professionals should be cognizant of payment protections that exist in most states and at the federal level via prompt payment statutes. The statutes are designed to ensure that contractors and subcontractors doing business with public owners and agencies receive payment promptly (even on private jobs).

Further reading:

• Are pay-if-paid clauses fair?
• Expanding liability for design professionals: The hits just keep coming
• It gets complicated when payment protections fail

For starters, there are separate Prompt Payment Acts at the federal level for design professionals and general contractors, entitling each to interest for late payments and other penalties. Most states have adopted versions of the PPA for general contractors which, depending on the jurisdiction, can apply to public and private projects and can include the ultimate remedy for nonpayment: the right to stop work. Design professionals may or may not qualify under each state’s PPA. As such, readers should know whether their contracts for professional services are governed by applicable state or federal statutes. Below are summaries of three recent federal cases involving disputes over the remedies afforded by a state’s PPA.

• In the first case, a court was asked to decide whether a designer was a subcontractor under Colorado’s PPA, such that penalty interest could be awarded to the engineering firm. The court held that because the designer performed some on-site labor, it could potentially recover interest on late payments.
• The second case involves a subcontractor who sued the general contractor for violation of New Jersey’s PPA. While the subcontractor sought prompt payment, the court ruled that the subcontract’s payment terms (45 days from receipt of payment from the owner) governed over the stricter payment terms under the statute (10 days from receipt of the invoice).
• The third case involves a fairly deep dive a court took to determine whether parties could waive, by contract, the prompt payment statute’s interest penalty provision. The court found that such a provision could not be waived, reinforcing the purpose of having a PPA for the added protection and benefit of contractors and subcontractors alike.

When does a designer qualify as a subcontractor?

In AECOM v. Flatiron, the contractor, Flatiron, countersued the designer, AECOM, on a highway expansion project after Flatiron’s expenditures nearly doubled due to change orders drastically increasing the contract price. While the jury returned a verdict for AECOM in the amount of $5 million, AECOM’s posttrial motion sought to add $2.5 million in prejudgment interest and another $4 million in penalty interest under Colorado’s PPA. Pursuant to the Colorado law, subcontractors may receive at least 15% interest if a contractor fails to pay its subcontractor within seven calendar days of receiving payment.

The question the court needed to consider was whether AECOM, a designer, qualified as a subcontractor within the meaning of the PPA. The PPA defines contractor as “any person, company, firm, or corporation which is a party to a contract with a contractor to construct, erect, alter, install, or repair any highway … and which, in connection therewith, furnishes and performs on-site labor with or without furnishing materials.” Flatiron argued that AECOM was not a subcontractor because it did not perform any on-site labor. AECOM disagreed.

After reviewing the evidence presented, the court found that AECOM did in fact perform on-site labor and, accordingly, could potentially recover penalty interest under the Colorado PPA. However, the court was not convinced AECOM presented sufficient evidence as to when Flatiron was paid for AECOM’s work, and therefore, AECOM did not recover the penalty interest in dispute.

Although the court declined to reopen the record to receive evidence on this particular issue, AECOM was awarded prejudgment interest. Regardless of the ruling on the PPA, it is noteworthy for design professionals doing business in Colorado that a designer may be classified as a subcontractor under the Colorado PPA and, thus, may be eligible for penalty interest if sufficient evidence is provided.

Contract’s payment terms prevail

In JJD Electric LLC v. SunPower Corporation, Systems, et al., the subcontractor, JJD Electric, sued the general contractor, SunPower, for violation of New Jersey’s PPA, among other claims. SunPower contracted with JJD Electric to provide electrical contracting service for various Delaware River Port Authority project locations.

The subcontract at issue expressly outlined how payments would be addressed and withheld and how other contractual obligations would be fulfilled by the parties. Importantly, the subcontract states that each payment request “shall be due and paid to Subcontractor within forty-five (45) days after SunPower receives the applicable payment request for Subcontractor’s Work and the payment conditions described in Article 7 are satisfied in full.” In other words, JJD Electric agreed to a pay-when-paid provision.

New Jersey’s PPA generally requires payment within 10 days of receiving a subcontractor (or contractor’s) invoice:

If a subcontractor ... has performed in accordance with the provisions of its contract with the prime contractor ... and the work has been accepted by the owner, the owner’s authorized approving agent, or the prime contractor, as applicable, and the parties have not otherwise agreed in writing, the prime contractor shall pay to its subcontractor ... within 10 calendar days of the receipt of each periodic payment, final payment or receipt of retainage monies, the full amount received for the work of the subcontractor ... based on the work completed or the services rendered under the applicable contract.

In addressing the claim, the U.S. District Court for the District of New Jersey noted that the case law addressing this statute is scarce. Ultimately, the court adopted the following elements a party must allege in its complaint in order to state a claim under subsection b of New Jersey’s PPA:

1. The subcontractor performed contractual work for the prime contractor.
2. The work was approved by the owner, the owner’s agent, or the prime contractor.
3. The prime contractor and subcontractor did not otherwise agree to terms of payment in writing.
4. The prime contractor did not pay the subcontractor within 10 calendar days of receipt of a proper invoice.

SunPower argued that the New Jersey PPA is designed as a default provision, i.e., when the parties have not otherwise agreed to payment terms. Conversely, JJD Electric argued that the PPA was intended to apply in instances of nonpayment by the prime contractor based upon the contractual terms agreed upon.

The court found the parties’ subcontract precluded JJD Electric from making a claim under New Jersey’s PPA. In other words, the parties “otherwise agreed to terms of payment in writing,” and those contractual payment terms controlled.

As such, the federal court dismissed JJD Electric’s count under the New Jersey PPA, making clear that a contract that defines payment terms (i.e., is not silent as to payment terms) controls over the statute. While JJD Electric could still sue for nonpayment (breach of contract), it would not be afforded remedies under the state’s PPA.

Waiving the right to penalty interest?

In C.J. Hughes Construction Co. Inc. v. EQM Gathering OPCO LLC, the U.S. Court of Appeals for the 3rd Circuit addressed issues related to the Pennsylvania Contractor and Subcontractor Payment Act.

EQM Gathering, the general contractor, sought bids for the construction of four segments of a pipeline. A contract for two of the segments was awarded to C.J. Hughes, the subcontractor. C.J. Hughes completed its work under the contract and then proceeded to submit demand for additional compensation for work done beyond EQM Gathering’s original projections – asserting that the extra work fell within the scope of the contract. EQM Gathering refused to pay, and thus C.J. Hughes sued, alleging breach of contract and seeking penalties and attorney fees under the Pennsylvania statute.

Pennsylvania’s law applies to all construction contracts in the state and entitles a contractor or subcontractor to prompt “payment from the party with whom the contractor or subcontractor has contracted,” in accordance with the provisions of a contract. It also allows for penalties when a party wrongfully withholds payment.

EQM Gathering argued that the contract, signed in 2015, expressly waived the right to recover penalty interest under the Pennsylvania law. However, there was a significant amendment to the statute in 2018 that expressly prohibited a waiver of any provision not expressly authorized under the act. For contracts entered into before Oct. 10, 2018, the law was silent regarding whether parties could waive liability for penalty interest.

In considering the “waivability” of the prompt payment act, the 3rd Circuit predicted how the Pennsylvania Supreme Court would decide this issue, holding that even prior to the law’s 2018 amendment, when a provision was silent, a waiver was not permitted. The court’s justification for this finding is rooted in the law’s purpose of ensuring broad protection for contractors and subcontractors and encouraging fair dealing among parties to a construction contract.

Accordingly, the 3rd Circuit found that not now, and not ever before, could a contract waive the penalty interest available to a subcontractor under Pennsylvania’s PPA.

Takeaways on prompt payment statutes

While these three cases highlight the inherent risk in litigating under any state or federal PPA, design professionals should know whether the jurisdiction in which they are rendering professional services is governed by a prompt payment statute. The short answer: Whether an engineering firm or architect can recover is state-specific. By and large, it generally depends on whether a state statute defines “contractor” or “subcontractor” as including architects and engineers. Likewise, applicability depends on whether the statute defines “construction contract” as inclusive of design services or limits the protections only to those providing labor and materials on-site.

Minnesota, for example, casts a wide net and includes “design” contracts in its state PPA such that general contractors who have engaged engineers or architects in a design-build context setting must promptly pay, with certain caveats. Delaware and California also include design services under their PPAs. Moreover, the cases discussed above demonstrate that the issue is very jurisdiction-specific.

While New Jersey expressly includes designers in its statute, Colorado’s statute contemplates protections for design professionals only where they perform on-site services. The Pennsylvania case outlined above permitted recovery of interest and attorney’s fees, even though the statute does not expressly cover design professionals. By contrast, Virginia recently amended its prompt payment statute to exclude architects and engineers. Likewise, Arizona has determined that its PPA does not apply to design professionals.

Things are even more nuanced where a state has separate prompt payment statutes for public and private projects. In Kansas, for example, architects and engineers are covered under the state’s public PPA but not its PPA governing private construction projects.

Of course, the precise type of design professional service being rendered must be evaluated as well, including whether it is construction supervision, requisition review, or off-site building information modeling, etc. With that said, the protections of prompt payment statutes can be very beneficial, provided those protections apply.