Are You In Compliance with Prompt Payment Laws? (Part 2)

Are You In Compliance with Prompt Payment Laws? (Part 2)

Maryann Holloway, CPA, RMA, PSA, Senior Manager
Posted by Maryann Holloway, CPA, RMA, PSA, Senior Manager on Aug 15, 2019 10:00:00 AM
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Architects at a construction site looking at blueprintsIn Part 1 of this series, the provisions of New Jersey Chapter Laws P.L. 2018, c. 127, a new law requiring prompt payment for goods and services under Local Public & Public School Contract Laws was discussed. I mentioned that this new law doesn’t change the existing law that governs the prompt payment requirements for improvements to real property and structures. With the new law effective in 2019, now is a good time to revisit the existing law which had been effective on September 1, 2006, Prompt Payment of Construction Contracts P.L. 2006, c. 96. The DLGS issued LFN 2006-21 to communicate the general provisions of the law.

For which contracts does this law apply?

  • The law applies to all local contracting units.
  • The dollar amount has no bearing on the law. Above or below the bid threshold, same requirements.
  • All improvements to real property and structures are subject to the law.
  • Structures are defined as any part of a building and other improvements to real property.
  • Improvements are defined in the law:
  • To build, alter, repair or demolish any structure upon, connected with, on or beneath the surface of any real property.
  • To excavate, clear, grade, fill or landscape any real property.
  • To construct driveways and private roadways on real property.
  • To furnish construction related materials, including trees and shrubbery, for any of the above purposes.
  • To perform any labor upon a structure, including any design, professional or skilled services furnished by an architect, engineer, land surveyor or landscape architect licenses or registered pursuant to the laws of this State.
  • Real property is defined as real estate. This includes publicly owned property including infrastructure such as roads, bridges, underground utilities, rights-of-way, and easements. It includes improvements to any land regardless of ownership or use.
  • The law covers contracts with general or prime contractors which is defined as any contractor that has contracted directly with the local unit for improvements.

Understanding Billing Dates and Payment Cycles

Workplace with tablet pc showing calendar and a cup of coffee on a wooden work table close-upUnder this law, a bill is interpreted as being an invoice, voucher, warrant, or whatever term the local unit uses to describe the documents submitted by the vendor requesting payment. The law uses the phrase periodic payment, final payment and retainage monies as the type of bills submitted on a billing date. Where the law defines the billing date for periodic payments as the date specified in the contract, it is silent on the definition of billing date for final payments and payments of retainage. Local contracting units should define these in its bid specifications and in contracts as the date the bill is received by the local unit. Under Local Public Contracts Law (LPCL) and not Public School Contracts Law (PSCL), construction contracts in excess of $100,000 require monthly payments.

As was the case with the new law in Part 1, the policy and procedures for the payment of claims follow N.J.S.A. 18A:19-1 et seq. and N.J.A.C. 6A:23-2.11(a) 1 for schools and N.J.S.A 40A:5-17 for all other contracting units. If the purchase requires governing body approval before payment, the contracting unit must arrange their meeting agendas and internal review procedures to ensure that the governing body can comply with billing dates and approve bills at any meeting. The law does not permit a contracting unit to restrict bill approval to those public meetings where “formal action” is taken if it will prevent meeting payment deadlines. While not directly required by the law, it is understood that contractors should have some certainty of when they will receive payment so local units should formally adopt a payment cycle and provide that information to contractors.

Required Procedures and Processes

In the prompt payment for construction contracts law, two sets of procedures are available.

Default Procedure

Applies to local units that do not require governing body approval to authorize the payment of bills. If the contractor has performed in accordance with the contract; and the work has been approved and certified by the owner or the owner’s “authorized approving agent,” the owner shall pay the bill not more than 30 calendar days after the billing date. The billing shall be deemed “approved” and “certified” 20 calendar days after the owner receives it, unless the owner provides, before the end of the 20-day period, a written statement of the amount withheld and the reason for withholding payment.

Alternative Procedure

Applies to local units that require governing body approval to authorize the payment of bills. To use this procedure, it must be defined in the bid specifications and contract documents. This procedure is the same as the default procedure except that the 20th calendar day deadline to approve and certify or decide to withhold full or partial payment is deferred until the public meeting following the 20 calendar days from the billing date. In addition, for billings approved, the 30-day payment requirement in the default procedure is replaced by the requirement that the bill be paid in the payment cycle following the meeting. The law anticipates prompt and timely notice to the contractor of any denial of payment, its deficiency, and what is required to resolve it.

What other provisions of the law are important to know?

  • Handsome lawyer in the law library at the universityAll contracts for improvements shall include a provision that disputes may be submitted to an alternative dispute resolution (ADR) procedure for bills (or portions) that are not approved. Either party can submit a claim to ADR. LFN AU-98-4 provides guidance on establishing an ADR and although this LFN doesn’t apply to schools and county colleges, these local units may find the LFN helpful.
  • Contractors have two enforcement provisions in the law:
  • If the contractor has not been paid when required and notice has not been provided as to why a bill or portion of it was not paid, the contractor can charge interest at the prime rate plus one percent from the day after the require payment date and ending on the day the check for payment is drawn. Contracting units should consult legal counsel when deciding to withhold payment.
  • The contractor is permitted to suspend work without penalty for breach of contract. The contractor can begin suspension after providing seven calendar days written notice to the owner if payment was not made when required by the law; the contractor was not provided a written statement including the amount withheld and the reason for withholding and the payer is not engaged in a good faith effort to resolve the reason for the withholding.
  • The two enforcement provisions shall not apply to any transportation projects as defined in section 3 of P.L. 1984, c.73 (N.J.S.A. 27:1B-3) (NJ Transportation Trust Fund Authority) if the project receives federal funding and the application of these provisions would jeopardize the funding due to the owner not meeting federal standards for its financial management systems.

Conclusion

In order to ensure that a contracting unit can meet the needs of its various stakeholders, the services provided by contractors for improvement to real property and structures are needed for the sustainability of the local government unit’s assets and infrastructure.Contractors need to receive timely payment for their services as they have obligations to their employees, vendors and subcontractors.Unwarranted payment delays hinder the good faith relationship between all parties.This law and the new one that was effective on February 1, 2019 were established to foster this good faith relationship.Are you in compliance with prompt payment laws?If not, review your policies and procedures and seek legal or other professional assistance if necessary.This two-part series began with Are You in Compliance with Prompt Payment Laws? (Part 1).

Topics: Government Entities