
In Texas, an established set of rules and regulations enables contractors, sub-contractors, and suppliers to pursue legal remedies if a general contractor or owner fails to pay them for services or work in a timely manner. These are known as prompt payment acts, and they deter delinquent payments by penalizing a delinquent payor with prompt pay interest, attorney’s fees, and suspension of performance.
Below, the Texas business and construction attorneys at MehaffyWeber discuss a current amendment to the Texas Prompt Payment Act that creates a strong defense for contractors and sub-contractors. This change could help these professionals deal with excessive change orders from clients.
What Is a Change Order?
Change order is a term used in the construction industry that means a construction contract has been amended, changing a contractor or subcontractor’s scope or amount of work. Change orders are common in the world of construction. Often, construction professionals encounter situations where they are asked to perform extra work without a signed change order.
In some cases, change orders are said to be on the way. Other times, there are unilateral change directives. These changes might be referred to in the provisions of a contract. Often in the past, contracts included provisions intended to keep the job moving by allowing owners to issue unilateral work directives.
Without proper change orders, contractors and subcontractors are put in a difficult position. They must decide whether to continue work without payment if the scope and cost have increased or face penalties. An unforeseen change order can leave contractors and subcontractors holding the bag—having to finance the job without assurance that they will actually collect payment for the extra work laid out in the change order.
The New Amendment to the Texas Prompt Payment Act
The Texas Prompt Payment Act provides legal protection for contractors and subcontractors working on construction projects in Texas. The law sets strict deadlines for payment and establishes penalties for past-due payments. It ensures the people who provide the labor and materials for a construction project receive their compensation in a timely manner.
Recently, the Texas Legislature handed contractors and subcontractors a new tool to limit change orders and ensure payment. In September 2023, the state passed two new statutes that limit an owner or contractor’s right to force substantial changes to a job on a contractor or subcontractor without their consent.
The two statutes are largely alike, but one offers protections for public projects, and the other deals with private work. The new rule allows contractors and subcontractors to decline any additional or changed work if the value of these changes or other unresolved directives adds up to 10% or more of the value stated on the original contract.
The specifics of the two separate codes break down like this:
Public Project Protections
Under the amended act, any contractor or subcontractor working on a public project has the right to deny any directive or work added to the original contract by a government entity if:
- They never received a written, fully executed change order from the governmental entity directing the additional work.
- The actual or anticipated value of the additional work exceeds 10% of the amount stated on their original public work contract under the contract’s terms.
Any contractor or subcontractor electing not to proceed with this additional work is not responsible for any damages associated with refusing to proceed.
Private Project Protections
According to the amended Texas Prompt Payment Act, contractors and subcontractors working on a private project may also decide not to proceed with owner-directed changes that cause additional work if:
- A written, fully executed change order for owner-directed additional work was never received.
- The additional work’s actual or anticipated value exceeds 10% or more of the contractor or subcontractor’s original contracted amount.
As stated before, contractors and subcontractors are not responsible for any damages because they decided not to proceed.
Navigating the Texas Prompt Payment Act
Under the Texas Prompt Payment Act, general contractors must pay their subcontractors within a certain timeframe, communicating the terms and timelines in an airtight contract. If general contractors receive funds for the work done by subcontractors, they are required to pay subcontractors within seven days of receiving these payments.
Suppose a general contractor is unhappy with the quantity or quality of the work performed by subcontractors, and disputes arise. In that case, the general contractor can withhold as much as 150% of the disputed amount. However, they are still required to pay for any undisputed work within the seven-day timeframe.
Also, if an owner or general contractor receives an invoice for work or materials, they have 35 days to provide payment to the vendor or subcontractor that submitted the invoice. If payment is not received in those 35 days, the owner or general contractor can be penalized and charged interest, starting on the 36th day and moving forward.
Delinquent payments by owners and general contractors may be subject to an interest penalty of 1.5% per month on any unpaid balances. It may seem like a small amount, but for those who choose not to pay their invoices on time, this interest can add up fast and make it a costly decision not to pay for goods and services rendered.
Learn More About How the Law Affects Your Construction Business
The Texas Prompt Payment Act is an important legal protection for the state’s contractors and subcontractors. For workers in the construction industry, the law provides security by laying out strict payment deadlines and penalties for those not in compliance. The Texas Prompt Payment Act ensures there are protections in place to guard against nonpayment.
Understanding how the Texas Prompt Payment Act may affect your business requires skilled guidance from the experienced Texas construction attorneys at MehaffyWeber. We are ready to help you interpret the law and its impact on your contracts. Contact us to schedule a discussion of your company’s needs in light of this new amendment.