An Overview of California’s Prompt Payment Laws

Confusion

California’s prompt payment laws are scattered throughout the state’s Business and Professions Code, Public Contracts Code and Civil Code and their applicability varies depending on the type of project; the type of payment, whether a progress payment or retention; and who is paying, whether it’s an owner, public entity, or direct contractor.

In short, it’s darn confusing. (That’s a cover of New Order’s single “Confusion,” released in 1993, by the way).

And, its become even more so with recent amendments to California’s statutory payment statutes, which eliminated some of the old prompt payment laws (but not all of them) and recodified them under new statutory sections, yet only amended (without eliminating) other prompt payment laws. So, If you’re confused, and who could blame you, this post is for you:

I.   Private Projects

A.   Progress Payments – Owners to Direct Contractors

1.   Deadline: An owner must pay a direct contractor within 30 days after notice demanding payment pursuant to the contract. (Civil Code §8800)

2.   Waivable: Yes, waivable in writing. (Civil Code §8800)

3.   Good Faith Disputes: If there is a good faith dispute between the owner and a direct contractor as to a progress payment otherwise due, the owner may withhold from the progress payment up to 150%of the disputed amount. (Civil Code §8800)

4.   Penalty: If an owner wrongfully withholds a progress payment it is liable for prompt payment penalties of 2% per month in lieu of any interest otherwise due. In an action for collection of the amount wrongfully withheld, the prevailing party is entitled to recovery of its reasonable attorney’s fees and costs. (Civil Code §8800)

B.   Retention Payment – Owner to Direct Contractors

1.   Deadline: If an owner has withheld retention from a direct contractor, the owner must pay the direct contractor within 45 days after completion of the work of improvement. However, if a part of the work of improvement will become property of a public entity, the owner may condition payment of retention on acceptance by the public entity of the part of the work improvement. (Civ. Code §8812)

2.   Waivable: No. (Civ. Code §8820)

3.   Good Faith Disputes: If there is a good faith dispute between the owner and the direct contractor as to retention otherwise due, the owner may withhold from the retention up to 150% of the disputed amount. (Civ. Code §8812)

4.   Completion of Disputed Work: If a direct contractor gives notice to the owner that work in dispute has been completed in accordance with the contract, the owner must give notice to the direct contractor of acceptance of rejection of the disputed work within 10 days. If accepted, the owner must pay the direct contractor the retention withheld relating to the disputed work within 10 days. (Civ. Code §8816)

5.   Penalty: If an owner wrongfully withholds retention it is liable for prompt payment penalties of 2% per month in lieu of of any interest otherwise due. In an action for collection of the amount wrongfully withheld, the prevailing party is entitled to recover its reasonable attorney’s fees and costs. (Civ. Code §8818)

6.   Applicability to Lenders: Does not apply to a retention payment withheld by a lender pursuant to a construction loan agreement. (Civ. Code §8822)

C.   Progress Payments – Direct Contractor to Subcontractors and Subcontractors to Other Subcontractors

1.   Deadline: A direct contractor must pay its subcontractors, and a subcontractor must pay its subcontractors, within 7 days after receiving a progress payment. (Bus. & Prof. Code §7108.5)

2.   Waivable: Yes, waivable in writing. (Bus. & Prof. Code §7108.5)

3.   Good Faith Disputes: If there is a good faith dispute between the direct contractor and a subcontractor, or between a subcontractor and its subcontractor, as to a progress payment otherwise due, the direct contractor or subcontractor may withhold from the progress payment up to 150% of the disputed amount. (Bus. & Prof. Code §7108.5)

4.   Penalty: If a direct contractor or subcontractor wrongfully withholds a progress payment the direct contractor or subcontractor is liable for prompt payment penalties of 2% per month and discipline by the California Contractors State License Board. In an action for collection of the amount wrongfully withheld, the prevailing party is entitled to recover its reasonable attorney’s fees and costs. (Bus. & Prof. Code §7108.5)

D.   Retention Payment – Direct Contractor to Subcontractors

1.   Deadline: If a direct contractor has withheld retention from one or more of its subcontractors, the direct contractor must pay its subcontractors within 10 days after receiving all or a portion of retention, unless the retention received is specifically designated for a particular subcontractor. (Civ. Code §8814)

2.   Waivable: No. (Civ. Code §8820)

3.   Good Faith Disputes: If there is a good faith dispute between the direct contractor and a subcontractor as to retention otherwise due, the direct contractor may withhold from the retention up to150% of the estimated value of the disputed amount. (Civ. Code §8814)

4.   Completion of Disputed Work: If a subcontractor gives notice to the direct contractor that work in dispute has been completed in accordance with the contract, the direct contractor must give notice to the subcontractor of acceptance of rejection of the disputed work within 10 days. If accepted, the direct contractor must pay the subcontractor the retention withheld relating to the disputed work within 10 days. (Civ. Code §8816)

5.   Penalty: If a direct contractor wrongfully withholds retention it is liable for prompt payment penalties of 2% per month in lieu of of any interest otherwise due. In an action for collection of the amount wrongfully withheld, the prevailing party is entitled to recover its reasonable attorney’s fees and costs. (Civ. Code §8818)

Note: While Business and Professions Code §7108.5 (progress payments) applies to both direct contractors and subcontractors, Civil Code §§8814 et seq. (retention) only applies to direct contractors.

II.  State Public Works Projects

A.   Progress Payments – Public Entities to Direct Contractors

1.   Deadline: A public entity must pay a direct contractor within 30 days after receipt of an undisputed payment request. (Pub. Contracts Code §10261.5)

2.   Waivable: Not addressed.

3.   Disputes: A payment request determined not to be proper must be returned to the direct contractor not later than 7 days after receipt. (Pub. Contracts Code §10261.5)

4.   Penalty: If a public entity fails to timely make a progress payment it is subject to interest at the rate of 10% per year. (Pub. Contracts Code §10261.5)

B.   Retention Payment – Public Entities to Direct Contractors

1.   Deadline: A public entity must pay a direct contractor within 60 days after completion of the work of improvement. (Pub. Contract Code §7107)

2.   Waivable: No.

3.   Disputes: If there is a dispute between a public entity and the direct contractor as to retention otherwise due, the public may withhold from the retention up to 150% of the disputed amount.

4.   Penalty: If a public entity wrongfully withholds retention it is liable for prompt payment penalties of 2% per month in lieu of of any interest otherwise due. In an action for collection of the amount wrongfully withheld, the prevailing party is entitled to recover its reasonable attorney’s fees and costs.

C.   Progress Payments – Direct Contractor to Subcontractors and Subcontractors to Other Subcontractors

1.   Deadline: A direct contractor must pay its subcontractors, and a subcontractor must pay its subcontractors, within 7 days after receiving a progress payment. (Bus. & Prof. Code §7108.5; Pub. Contracts Code §10262)

2.   Waivable: Yes, waivable in writing. (Bus. & Prof. Code §7108.5)

3.   Good Faith Disputes: If there is a good faith dispute between the direct contractor and a subcontractor, or between a subcontractor and its subcontractor, as to a progress payment otherwise due, the direct contractor or subcontractor may withhold from the progress payment up to 150% of the disputed amount. (Bus. & Prof. Code §7108.5; Pub. Contracts Code §10262.5)

4.   Penalty: If a direct contractor or subcontractor wrongfully withholds a progress payment the direct contractor or subcontractor is liable for prompt payment penalties of 2% per month, discipline by the California Contractors State License Board, and termination by the contracting agency. In an action for collection of the amount wrongfully withheld, the prevailing party is entitled to recover its reasonable attorney’s fees and costs. (Bus. & Prof. Code §7108.5; Pub. Contracts Code §§10262, 10262.5)

D.   Retention – Direct Contractors to Subcontractors

1.   Deadline: A direct contractor must pay its subcontractors within 7 days after receiving all or any portion of retention, unless the retention received is specifically designated for a particular subcontractor. (Pub. Contracts Code §7107)

2.   Waivable: No. (Pub. Contracts Code §7107)

3.   Bona Fide Disputes: If there is a bona fide dispute between a direct contractor and a subcontractor as to retention otherwise due, the direct contractor may withhold from the retention up to 150% of the estimated value of the disputed amount. (Pub. Contracts Code §7107)

4.   Penalty: If a direct contractor wrongfully withholds a retention payment the direct contractor is liable for prompt payment penalties of 2% per month in lieu of of any interest otherwise due. In an action for collection of the amount wrongfully withheld, the prevailing party is entitled to recover its reasonable attorney’s fees and costs. (Pub. Contracts Code §7107)

Note: While Business and Professions Code §7108.5 (progress payments) applies to both direct contractors and subcontractors, Public Contracts Code §7107 (retention) only applies to direct contractors.

III.  Public Utility Projects

A.   Progress Payments – Direct Contractor to Subcontractors

1.   Deadline: A direct contractor must pay its subcontractors within 21 days after receiving a progress payment. (Civ. Code §8802)

2.   Waivable: Yes, waivable in writing. (Civ. Code §8802)

3.   Good Faith Disputes: If there is a good faith dispute between the direct contractor and a subcontractor as to a progress payment otherwise due, the direct contractor may withhold from the progress payment up to 150% of the disputed amount. (Civ. Code §8802)

4.   Penalty: If a direct contractor wrongfully withholds a progress payment it is liable for prompt payment penalties of 2% per month. In an action for collection of the amount wrongfully withheld, the prevailing party is entitled to recover its reasonable attorney’s fees and costs. (Civ. Code §8802)

IV.  California State University Projects

A.   Progress Payments – CSU to Direct Contractors

1.   Deadline: CSU must pay its direct contractors within 39 days after receipt of an undisputed and properly submitted payment request. (Pub. Contracts Code §10853)

2.   Waivable: Not addressed.

3.   Disputes: A payment request determined not to be proper must be returned to the direct contractor not later than 7 days after receipt. (Pub. Contracts Code §10853)

4.   Penalty: If CSU fails to timely make a progress payment it is subject to interest at the rate of 10% per year. (Pub. Contracts Code §10853)

V.  Local Public Works Projects

A.   Progress Payments – Local Public Entities to Direct Contractors

1.   Deadline: A local public entities must pay a direct contractorswithin 30 days after receipt of an undisputed and properly submitted payment request. (Pub. Contracts Code §20104.50)

2.   Waivable: Not addressed.

3.   Disputes: A payment request determined not to be proper must be returned to the direct contractor not later than 7 days after receipt. (Pub. Contracts Code §20104.50)

4.   Penalty: If a local public entity fails to timely make a progress payment it is subject to interest at the rate of 10% per year. (Pub. Contracts Code §20104.50)

VI.  Contracts with Design Professionals

A.   Private Works Projects

1.   Contractually Agreed Late Payment Penalties: In a written contract for a private work of improvement entered into on or after January 1, 1996, a contracting party and design professional may agree to contractual provisions that include a late payment penalty in lieu of any interest otherwise due. The term “design professional” is defined as a licensed architect, registered professional engineer, or licensed land surveyor. (Civil Code §3319).

B.   Public Works Projects

1.   Public Entities to Design Professionals

a.   Progress Payments

i.   Deadline: For contacts for public works of improvement entered into on or after January 1, 1996, a public entity must pay a prime design professional within 30 days after receipt of a written demand for payment. (Civil Code  §3320)

ii.   Waivable: Not addressed.

iii.   Disputes: If a public entity disputes in good faith any portion of the amount due, it may withhold from the payment an amount not to exceed 150% of the disputed amount. (Civ. Code §3320)

iv.   Penalty: If a public entity fails to timely make a progress payment it is subject to a penalty of 1.5% per month. In an action for collection of the amount wrongfully withheld, the prevailing party is entitled to recover its reasonable attorney’s fees and costs. (Civ. Code §3320)

b.   Retention

i.   Deadline: For contacts for public works of improvement entered into on or after January 1, 1996, a public entity must pay a prime design professional within 45 days after receipt of a written demand for retention. (Civil Code  §3320)

ii.   Waivable: Not addressed.

iii.   Disputes: If a public entity disputes in good faith any portion of the amount due, it may withhold from the payment an amount not to exceed 150% of the disputed amount. (Civ. Code §3320)

iv.   Penalty: If a public entity fails to timely pay retention it is subject to a penalty of 1.5% per month. In an action for collection of the amount wrongfully withheld, the prevailing party is entitled to recover its reasonable attorney’s fees and costs. (Civ. Code §3320)

Note: Does not apply to state agency contracts subject to Government Code section 927.6. (Civ. Code §3320)

2.   Design Professionals to Subconsultant Design Professionals

i.    Deadline: A prime design professional on a public works of improvement must pay its subconsultant design professionals within 15 days after receipt of each progress payment or retention payment. (Civ. Code §3321)

ii.   Waivable: Not addressed.

iii.   Disputes: If a prime design professional disputes in good faith any portion of the amount due, it may withhold from the payment an amount not to exceed 150% of the disputed amount.  (Civ. Code §3321)

iv.   Penalty: If a prime design professional fails to timely make a progress payment or fails to timely pay retention it is subject to a penalty of 1.5% per month. In an action for collection of the amount wrongfully withheld, the prevailing party is entitled to recover its reasonable attorney’s fees and costs.  (Civ. Code §3321)

25 Responses to “An Overview of California’s Prompt Payment Laws”

  1. Antonetta

    Hey there! Someone in my Facebook group shared this site with us so I came to
    check it out. I’m definitely loving the information.

    I’m bookmzrking and will be tweeting thhis to my
    followers! Great blog and amazing style and design.

    Reply
  2. Ray Zenk

    We are doing work on a Santa Monica High School paid from public funds, that we are qetting directives from our customer and they are being directed from the prime contractor to do extra work. As of todate this work has been ongoing and has reached a value of over $800k we have a substantial amount of this work yet to do and need to be paid. We are working in good faith and have a clause in our subcontract that if not paid we have a right to stop work. What can we llegally do to get paid? There are a lot more circumstances/issues between the prime contractor and our customer but we were directed and performed or are performing the work. Do you have any suggestions based on California Law? Thanks, Ray

    Reply
    • Garret Murai

      Hi Ray. On public works projects you have a couple of options: serving a stop payment notice or making a payment bond claim. This is in addition to any contractual rights you may have such as the stop work provisions in your subcontract. Before you take the rather big step of stopping work, however, I would consult an attorney, as there could be ramifications if you are found to have abandoned the project.

      Reply
  3. rick

    Thank you for this information. We are a subcontractor doing work for a GC in the SoCal area. The GC is refusing to pay us because it claims it has not received payment from the Owner (contract gives pay when paid terms). However, we do not believe the owner has actually withheld payment from the GC and believe the GC is probably trying to hide some payments it has received from the owner. The owner, for his part, has been silent about the whole matter, insisting we only deal with the GC. Does the prompt payment act give us any ability to find out what the owner has paid the GC? How are subcontractors supposed to know when their GC has been paid?

    Reply
    • Garret Murai

      Hi Rick. Thanks for reading. Unfortunately, while the prompt payment laws provide for penalties if a general contractor fails to pay its subcontractors on a timely basis, it does not provide a means by which a subcontractor can determine when the GC has been paid by the owner outside of filing a lawsuit.

      Reply
  4. henry

    What would constitute a waiver in writing under Civil Code §8800? Does the clause “payment due upon completion of framing” be a waiver of the 30 days?

    Reply
    • Garret Murai

      Hi Henry. As you’ve discovered, Civil Code section 8800 does not address what constitutes a waiver in writing. However, I believe that a provision in a contract that alters the default 30 day payment provision of Section 8800 would constitute a waiver, including a provision like the one you’ve suggested.

      Reply
      • henry

        That doesn’t make quite sense to me as it seems to me as the progress payment can not become due until the framing is completed.
        So essentially specifying when a payment becomes due would in itself become a waiver rather than starting the 30 day clock? How else would you define progress payments other than due upon completion of a construction phase and shouldn’t any waiver of rights for the consumer presumed to be more explicit?

      • Garret Murai

        Hi Henry. I don’t think I understand your question. California’s prompt payment laws govern when payment must be made from the date of invoicing (by the GC) or following payment (to lower tiered contractors and suppliers). Payments don’t need to be based on completion of each phase of a project (e.g., say after framing is completed, to use your example) but can be based on percentage complete during each pay period.

  5. Jesse

    Hello,

    Thank you very much for the information.
    It seems that most information about this law is in regard to construction jobs. But what about other types of contracts and invoices?

    For instance, if a graphic designer does work for a company in California, is that company (the client) also required to pay that invoice within 30 days to avoid penalties? Or does this law only apply to the construction industry?

    This would be a great thing to know, as I work in entertainment doing free lance jobs. Often my clients say that it’s their policy to pay net 60 or sometimes even net 90. Is that a violation?

    Much appreciated,

    Jesse

    Reply
    • Garret Murai

      Hi Jesse. I’m a construction attorney so I don’t know if there are similar prompt payment laws applicable to graphic designers, or others in general, outside of construction. Generally, however, payment terms are subject to the agreement of the parties, so if your contract says “net 60” or “net 90” those would be the payment terms.

      Reply
      • Melissa Rudolph

        I am a subcontractor in CA and working on a high end home. My proposal has % of contract progress payments due after certain phases of our work. The GC is holding back from submitting the invoice in the draw to owner because he feels he has paid enough % thus far in comparison to the work completed. Is it his right to determine what % of the progress payment (in the contract) that he has to pay? I have more expenses at the front end of the job, and therefore bill accordingly.

      • Garret Murai

        Hi Melissa. It sounds like the GC believes you are “upside down”on your contract, meaning that you have billed for more work than you have done. Unfortunately, there’s no statute or case I am aware of that has directly addressed this. Thus, you’re left with your contract. If your contract sets forth certain percentage of contract payments that are to be made after completion of certain phases of the project, and you have in fact performed that phase, then it sounds like the GC is in breach of the contract. Whether you have incurred more expense at the front of the job seems irrelevant if the parties contractually agreed to a percentage of contract/phase payment schedule.

  6. MARIE UPDEGROVE

    Hi Garret – We are a GC working for a School District on a new charter school project. Their funding was supposed to be from the State, however we are well into the job and they have not been able to secure their funding. They have not paid us in several months and currently owe around $2,000,000 . Is there a law that allows us to stop work for non-payment without being penalized by the owner? Does Civil Code 8838 extend to public works or is that for private work only? Thank you!

    Reply
    • Garret Murai

      Hi Marie. A stop work notice, not to be confused with a stop payment notice, is not available on public works projects. For more information on stop work notices you can read our post on stop work notices here. Since a stop work notice would not apply to your situation, whether you can stop work on a public works projects will depend on what your contract says and the factual circumstances involved (i.e., in other words, I would suggest you contact your lawyer), although I would say that being $2,000,000 into a project without being paid is quite a lot.

      Reply
  7. Lynn Murphy

    Does a subcontractor have to release retention to a sub-tier subcontractor if the subcontractor has not received payment on retention from the GC?

    Reply
    • Garret Murai

      Hi Lynn. Thanks for reading. The answer is: it depends. It depends in part on what your contract says about retention. If your contract says that retention will be paid within “x” number of days after receipt of a final invoice from your sub-subcontractor, then you have to pay within “x” number of days after receipt of a final invoice from your sub-subcontractor. On the other hand, if your contract says that you don’t have to pay until “x” number of days after your receipt of retention from the higher-tiered party you contracted with, then you don’t have to pay until “x” number of days after your receipt of retention from the higher-tiered party you contracted with. Alternatively, if your contract is silent as to when retention is owed, then you must pay your sub-subcontractor within a reasonable time after your receipt of retention from the party you contracted with. The only caveat to the above is that in California “pay if paid” provisions are illegal. That is, if you have a contract provision that says that you will only pay retention (or progress payments) if you receive retention (or progress payments) from the higher-tiered party you contracted with, such a provision is illegal. Note, however, that this is different than a “pay when paid” provision which provides that you will pay retention (or progress payments) when you are paid retention (or progress payments) from the higher-tiered party you are in contract with, which is legal in California (and is construed as requiring payment within a reasonable period of time).

      Reply
  8. Ron Rodriguez

    Hi, I received a bill for construction on tenant improvements for an office I lease. The contract was made and improvements done almost 5 years ago! I thought the terms of the contract were fulfilled but the sub-contractor has come up with a contract (unsigned) that has different terms than what I understood (I don’t have a signed contract at all). It all seems shady. What is the Statute of Limitations on a building contract?

    Reply
  9. Michael

    If the contract for a residential home improvement project does not explicitly mention “retentions”, is the final payment considered a “retention payment” or a “progress payment”? Also, if the contract says “… balance [due] at completion”, would the language “at completion” supersede the statutory 30 or 45 days payment period and imply that payment is due immediately at time of completion, or would it mean that the contractor can demand payment at or after completion, which would start the 30/45 day period before penalties apply? In other words, is a “demand” still required to actually start the specified statutory payment period?

    Reply
    • Garret Murai

      Hi Michael. As to you question about final payment, it would depend on whether retention was withheld or not. If retention was withheld, the final payment would include retention. If retention was not withheld the final payment wouldn’t. As to your question about the “at completion” language, while an argument could be made that such language requires immediate payment, for purposes of he prompt payment statutes I believe a more reasonable reading is that it requires payment within a reasonable amount of time, but if made after the prompt payment deadlines, you would be subject to prompt payment penalties.

      Reply

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Basic HTML is allowed. Your email address will not be published.

Subscribe to this comment feed via RSS

%d bloggers like this: