Summer is here and it is time to pull out your standard contract, dust it off, and review its terms and conditions. In Virginia, there have been some significant changes in statutes that may impact what you can and cannot put into your contract.
In 2022, the General Assembly modified several statutes for certain construction contracts executed on or after January 1, 2023. Virginia changed its statutes to: (1) prohibit “pay-if-paid” clauses in construction contracts; and (2) define when payments are due on construction projects. The 2022 legislation was revised in the 2023 General Assembly Session (HB2500) to provide:
- Public Projects: The statute now explicitly states that a contractor: (1) is liable for the entire amount owed to a subcontractor even if the contractor has not received payment from the state agency or local government; and (2) must pay the subcontractor within the earlier of either 7 days of receiving payment from the state or 60 days of receiving an invoice following “satisfactory completion” of the work for which the subcontractor has invoiced. If a contractor intends to withhold any amounts invoiced by a subcontractor, a contractor must now notify the subcontractor in writing within 50 days of receiving the subcontractor’s invoice and the contractor’s written notice must identify the contractual noncompliance, the dollar amount being withheld, and the lower-tier subcontractor responsible for the contractual non-compliance. Payment by the public owner to the contractor cannot be a condition precedent to payment to any lower-tier subcontractor. Notwithstanding the foregoing, a contract can include a retainage provision and the foregoing does not apply to contracts for professional services where the public body is contracting directly with an architect or engineer firm.
- Private Projects:
- Owner / General Contractor Contracts:
- The 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 a general contractor’s noncompliance with the terms of the contract.
- However, the owner must now notify the general contractor in writing within 45 days of receiving an invoice of the owner’s intention to withhold payment to the general contractor and the written notice must identify: (1) the contractual noncompliance; and (2) the dollar amount being withheld.
- Contractor / Subcontractor Contracts:
- For any contract between a “general contractor” and a “subcontractor” the “general contractor” must pay the “subcontractor” within the earlier of: (1) 60 days of receiving an invoice “following satisfactory completion of the portion of the work for which the subcontractor has invoiced; or (2) 7 days after receipt of amounts paid by the owner to the “general contractor.”
- “Contractors” are not liable for amounts otherwise reducible due to the subcontractor’s noncompliance with the terms of the contract. However, if a “contractor” withholds all or part of the amount invoiced by a “subcontractor” under the contract, the “contractor” must notify the “subcontractor” in writing within 50 days of receiving the invoice of the “contractor’s” intention to withhold all or a part of the “subcontractor’s” payment and the written notice must identify: (1) the contractual noncompliance; (2) the dollar amount being withheld; and (3) the “subcontractor” responsible for the contractual noncompliance.
- Payment by the upstream party cannot be a condition precedent to payment to any “subcontractor,” unless the party contracting with the “contractor” is insolvent or a debtor in bankruptcy.
- Every subcontract between a “subcontractor” and a “lower-tier subcontractor or supplier, of any tier,” must include an identical payment, notice, and interest requirements as those noted above.
- The statute includes a limitation on its application if: (1) the project is not related to a single-family residence; and (2) the value “of the project, or an aggregate of projects under such construction contract,” is greater than $500,000.00. There is some confusion in the statute regarding the application of this limitation that you should discuss with your construction attorney.
- The private construction contracts to which the statute applies may contain retainage provisions.
- The failure to make timely payments under the statute can subject the delinquent contractor to interest payments detailed in the public procurement statutes.
- Owner / General Contractor Contracts:
- When reviewing your contracts, you should pay careful attention to the terms “general contractor,” “contractor,” “subcontractor,” and “lower-tier subcontractor” and to the limitations on the application of the statute. General contractors and subcontractors should also work closely with their upstream and downstream counterparts to create a payment application process that allows the parties to comply with the statutes and the contracts as far as submission, notice, payment,
Please contact PLDR or your construction attorney to consider updating your standard contract or if you have questions about the current state of Virginia’s law for construction projects.
The 2023 Legislation (HB2500) can be found here –
https://lis.virginia.gov/cgi-bin/legp604.exe?231+ful+CHAP0675
