Colorado Construction Payment Reform Act of 2009
In an attempt to shorten the time owners have to pay contractors and subcontractors, the Colorado Legislature introduced Colorado Senate Bill 09-095 (the “Construction Payment Reform Act of 2009” (“Act”)). While the Act is designed to protect contractors and subcontractors, it will require that everyone in the construction and development industry – including lenders and owners – adapt.
I. THE ACT
A. Who and
what will be impacted?
As currently drafted, the Act applies to all
private construction contracts worth more than $100,000, except contracts for
the construction of “single-family or multi-family dwellings with no more than
two units.” It also exempts construction contracts that take less than one
month to complete, single payment and unit-price contracts, and contracts
payable in installments or upon completion.
B. How the
Act works?
The Act requires that all contractors and subcontractors be
paid within thirty days after the end of each “billing cycle”, which is a cycle
agreed upon by the contractor and owner under the general contract.
Surprisingly, however, the term “billing cycle” is not currently defined by the
Act. Instead, the Act provides flexibility for the general contractor and owner
to negotiate appropriate billing cycles on a project by project basis.
Payment terms that conflict with the Act are “unenforceable and void.”
1. Contracts
that involve the use of a subcontractor.
Regardless of the length of the
billing cycle agreed upon by the general contractor and owner, the subcontractor
is required to submit to the contractor a progress payment invoice
(“Subcontractor Invoice”), on a monthly basis, for work and materials actually
provided during the month to the general contractor. The contractor must
approve all or a portion of the Subcontractor Invoice within seven days. By
approving all or a portion of the progress payment, the contractor does not
waive claims for work not in conformance with the agreement, breach of
agreement, and wrongful acts or omissions.
The general contractor will submit progress payment invoice (“GC Invoice”) to the owner at the end of each billing cycle as defined in the general contract. The general contractor must include within the GC invoice, the amounts shown in the Subcontractor Invoices, less amounts disapproved by the general contractor within the 7 day window for objection as described above. Unless otherwise agreed to in the general contract, the owner must pay the contractor within twenty-five days after receiving the GC Invoice. The contractor is then required to pay the subcontractors within five days.
2. Contracts
that do not involve the use of a subcontractor.
At the end of each billing
cycle, the general contractor must submit to the owner the GC Invoice for all
work and materials actually provided. Unless otherwise agreed to in the general
contract, the owner must pay the contractor within thirty days after receiving
the GC Invoice. By approving all or a portion of the progress payment, the
owner does not waive claims for work not in conformance with the agreement,
breach of agreement, and wrongful acts or omissions.
C. What
else does the Act do?
The Act imposes stiff financial penalties for
failure to timely pay contractors and subcontractors. For instance, if the
owner or contractor fails to promptly pay, it must also pay 12% interest per
annum (or as set forth in the agreement) on the unpaid amount.
Additionally, the Act:
Permits parties to lengthen the time an owner has to make progress payments to a contractor from twenty-five to seventy-five days from receipt of the GC invoice.
- Authorizes, but restricts, retainage;
- Imposes new procedures for change directives;
- Permits a contractor or subcontractor to suspend performance if they have not received timely payments;
- For contracts in excess of $250,000, allows a contractor to ask the owner to provide a written statement of the owner’s ability to pay.
II. POTENTIAL PITFALLS
If the Act becomes law, it will significantly change important facets of the relationship between owners, general contractors and subcontractors, and affect the terms of construction loans. Some potentially significant obstacles these parties are likely to face under the Act are as follows:
- What happens if defects in the subcontractor’s work are discovered after the owner has paid the general contractor but before the general contractor paid the subcontractor? The Act requires general contractors to pay subcontractors within five days of receiving payment from the owner. Can the general contractor refuse to pay the subcontractor within five days? If the contractor does not pay the subcontractor, who is in default? Can the general contractor return the money to the owner?
- Will Colorado lenders be willing coordinate with borrowers, so the lenders will issue objections to draw requests and/or make disbursements in amounts and within times to permit borrowers to comply with the time limits applicable for objections and payments under the Act?
- If an owner defaults and the lenders has taken over the project, will the Act apply to the lender?
- General contractors have seven days to identify, and give detailed written notice of defects in work performed by subcontractors. Are Colorado general contractors prepared to review and approve or deny the subcontractor’s work in just seven days?
We will continue to monitor the Act and its amendments and explore its impact on the Colorado construction industry. For now, the Act is before the Committee on Appropriations, following recommendation by the State, Veterans, & Military Affairs Committee. A complete copy of the Act is available for review at: http://www.leg.state.co.us/
Daniel W. Glasser is Of Counsel to Fennemore Craig. He represents clients in commercial litigation and bankruptcy, with a focus on resolving construction-related disputes. He is licensed in Colorado, Arizona, and Nevada. Contact Dan directly at (303) 291-3203, or dglasser@fclaw.com.
Scott D. McDonald is an associate of Fennemore Craig, P.C. An Arizona lawyer, Scott practices in the firm’s Phoenix and Tucson offices, with a focus on resolving construction-related disputes. Contact Scott directly at 502-879-6827, or sdmcdona@fclaw.com.
Fennemore Craig, P.C., is a major firm in the Southwest, with offices in Denver, Colorado, Las Vegas, Nevada; Phoenix, Arizona; Tucson, Arizona; and Nogales, Arizona.
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Categories: Colorado | Construction