2023 Changes to Virginia's Construction Payment Terms

In April 2022, we discussed new amendments to Virginia’s Prompt Payment Act and Wage Theft statute. Although the 2022 amendments changed payment terms for all construction contracts in Virginia, the amended statutes established inconsistent obligations between public and private contracts. On March 27, 2023, the Governor signed into law House Bill 2500 and Senate Bill 1313, which amend the Prompt Payment Act and Wage Theft statute by clarifying the statutes’ notice provisions and definitions. The latest amendments to the Prompt Payment Act and Wage Theft statute take effect on July 1, 2023. Below are the key takeaways from the 2023 amendments to the Prompt Payment Act and Wage Theft statute.

Changes to the Prompt Payment Act (Va. Code § 2.2-4354)

Under the 2022 amendments, the Prompt Payment Act required contractors to pay subcontractors, regardless of whether the contractor first received payment from the public body. Noticeably absent from the 2022 amendments, however, was the timing of when payment should be made to a subcontractor when payment has not been received by the public body. Now, thanks to HB 2500 and SB 1313, the Prompt Payment Act expressly provides that if payment is not received from a public body, then the contractor must pay its subcontractor “within 60 days of the receipt of an invoice following satisfactory completion of the work for which the subcontractor has invoiced.”

Additionally, the Prompt Payment Act now provides that a contractor may choose to withhold payment from the subcontractor, but to do so, the contractor must first notify the subcontractor of its intention to withhold payment with the reason for nonpayment, specifically identifying the contractual noncompliance, the dollar amount being withheld, and the lower-tier subcontractor responsible for the contractual noncompliance. This notification must be sent within 50 days of receipt of the subcontractor’s invoice.

Of note, these changes to the Prompt Payment Act do not apply to contracts solely for professional services between a public body and an architectural and engineering firm.

Changes to Virginia’s Wage Theft Statute (Va. Code § 11-4.6)

Under the 2022 amendments, Virginia law required—for the first time—payment to be made from the owner of a project to its contractors. The 2022 amendments also provided that owners and contractors could withhold payment from contractors and subcontractors, however, the statute’s definitions, trigger for the payment deadline, notice of withholding provisions for withholding payment were ambiguous or inconsistent between sections.

Now, under the 2023 amendments, the starting point for how to calculate when payment is due is consistent at each level of the contracting chain.  An owner must pay a general contractor “within 60 days of the receipt of an invoice following satisfactory completion of the portion of the work for which the general contractor has invoiced.” The owner is not “liable for amounts otherwise reducible due to the general contractor’s noncompliance with the terms of the contract.” This same language is now repeated for a contractor’s obligation for payment to a subcontractor and sub-contractors and suppliers: payment is due within the earlier of (i) 60 days of the receipt of an invoice following satisfactory completion of the portion of the work for which the subcontractor has invoiced; or (ii) seven days after receipt of amounts paid by the owner to the general contractor or by the contractor to the subcontractor for the work performed by the subcontractor pursuant to the terms of the contract. Contractors are not liable for amounts “otherwise reducible due to the subcontractor’s noncompliance with the terms of the contract.”

The definition of “Subcontractor” has now changed in the Wage Theft Statute to be consistent with the definition in the Virginia Public Procurement Act, meaning that it now includes both subcontractors and material suppliers.

This statute also now has new, separate deadlines to provide notice of a withholding before the deadline for payment occurs. An owner intending to withhold payment must notify the general contractor of its intention to withhold payment with the reason for nonpayment, specifically identifying the contractual noncompliance and the dollar amount being withheld. This notification must be sent within 45 days of receipt of the general contractor’s invoice.

The general contractor gets an additional 5 days to react to owner’s withholding decision, such that if it must notify the subcontractor within 50 days of receipt of the subcontractor’s invoice of its intention to withhold payment with the reason for nonpayment, specifically identifying the contractual noncompliance, the dollar amount being withheld, and the subcontractor responsible for the contractual noncompliance.

Of note, the statute no longer uses the terms “higher-tier” or “lower-tier” contractors, but mandates identical payment and notice provision between a subcontractor and lower-tier subcontractor or supplier if the project is not a single-family residential project, or is a project (or aggregate of projects) where the value is less than $500,000.

Finally, the Prompt Payment Act has different interest provisions than the Wage Theft Act. Under the Prompt Payment Act, interest is due subcontractors or suppliers for late payment at the rate of one percent per month, unless otherwise provided under the terms of the contract. Presumably, a subcontract could specify a lower rate of interest. By contrast, the Wage Theft Statute cites a different interest provision for a public owner’s late payment to a general contractor requiring interest at the prime rate as reported in the Wall Street Journal. This prime rate now applies to all commercial contracts.

Conclusion

The latest changes to Virginia’s Prompt Payment Act and Wage Theft statute clarify some of the inconsistencies between the two statutes, but more changes are likely to be made in the future to address other ambiguities. Regardless, all contractors should review their contracts to ensure that they include these most recent changes.