By Lauren P. McLaughlin, Shoshana E. Rothman, and Joshua E. Holt of Smith, Currie & Hancock LLP
Originally published January 20, 2023
As we previously reported, Virginia recently enacted legislation banning the use of conditional payment clauses, known as “pay-if-paid” clauses, on both public and private construction projects within the Commonwealth. The legislation, known as “SB 550,” went into effect on January 1, 2023, and applies to all construction contracts executed on or after that date.
As a reminder, SB 550 changes the law governing construction contracts in Virginia in two important respects. First, it prohibits contractors and subcontractors on both public and private construction projects from including provisions in their subcontracts that condition payment on the receipt of funds from the owner or higher-tier contractor. Second, it establishes fixed deadlines for the payment of invoices on private projects. Specifically, SB 550 provides that owners on private projects must pay their contractors within 60 days after receiving an invoice from the contractor, and contractors and subcontractors on private projects must pay their subcontractors by the earlier of 60 days after satisfactory completion of the work for which payment is sought or 7 days after receiving payment from the owner or higher-tier contractor for the subcontractor’s work. Owners, contractors, and subcontractors are entitled to withhold payment for nonconforming work, but SB 550 requires written notice articulating the specific reasons for the withholding.
Unfortunately, the language of SB 550 is far from a model of clarity. In fact, at the end of 2022—before the legislation went into effect—the Department of General Services’ Public Body Procurement Workgroup (the “Workgroup”) issued a report outlining several amendments that the General Assembly should make to SB 550 in order to correct certain ambiguities and inconsistencies in the legislative text. Those amendments include:
- Adopting uniform definitions of “construction/construction contract,” “contractor/general contractor,” and “subcontractor”;
- Clarifying whether contracts for professional services, including architectural and engineering services, fall within the scope of SB 550;
- Adopting uniform language for the provisions permitting owners and higher-tier contractors to withhold payments from lower-tier contractors due to nonconforming work;
- Adopting uniform language for the provisions requiring owners and higher-tier contractors to notify lower-tier contractors about the withholding of payments;
- Establishing a deadline for when such notice of withholding must be given;
- Reconciling the inconsistency between the provision making contractors on public projects liable for the “entire amount owed” to their subcontractors with the language requiring such contractors to pay their subcontractors the “proportionate share” of funds received from the public body within 7 days of receiving such funds;
- Clarifying that the provision making contractors on public projects liable for the “entire amount owed” to their subcontractors is not intended to affect the contractor’s right to withhold retainage;
- Specifying when contractors on public projects must pay their subcontractors if the contractor has not received payment from the public body;
- Updating the headings of the various statutes that SB 550 amends to include references to the new provisions regarding the timing of payments;
- Clarifying that the provision regarding the timing of payments on private projects only applies to construction contracts;
- Reconciling the inconsistency between the provision requiring owners on private projects to pay general contractors within 60 days of “receipt of an invoice” with the provision requiring contractors on such projects to pay their subcontractors within the earlier of (i) 60 days after “satisfactory completion” of the work for which payment is sought or (ii) 7 days after receipt of payment from the owner; and
- Revising the inconsistent and confusing terminology in the provision regarding payments on private projects by (i) using the terms “general contractor” and “subcontractor,” as opposed to “higher-tier contractor” and “lower-tier contractor,” and (ii) inserting language that will require all contractors to include the payment requirements of SB 550 in their subcontracts.
The General Assembly will reconvene for the 2023 legislative session this month. However, it is unlikely that the legislature will consider, much less adopt, any of the Workgroup’s recommendations until later in the year. Project owners and contractors throughout Virginia must, therefore, do their best to abide by the new payment obligations created by SB 550, as written, while also preparing for the possibility that the General Assembly may change – or at least clarify – those obligations in the near future.