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Changes to a New York law aimed at speeding up the time it takes contractors to get paid could do the opposite.
That’s the opinion of a New York City real estate attorney.
“I think the amendment creates more problems for owners and contractors,” said Charles Pierce, a member and head of the construction law department at Rosenberg & Estis, a New York City real estate law firm. “Most disputes I see involve whether the owner or contractor properly approved or disapproved an invoice within 12 business days and whether the money was properly withheld.”
New York’s Prompt Payment Law, which sets standards governing private commercial construction contracts that exceed $150,000, was amended last year, with the changes taking effect Nov. 17.
The amendment limits the amount of retention an owner can withhold from a contractor, which owners routinely do to ensure quality project completion and contractual compliance, to 5 percent of the project value. The change also allows contractors to submit final invoices for the full price of a job at “substantial” completion rather than final completion.
But while the act is intended to streamline the payment process for contractors, the amendment’s language ultimately doesn’t make sense, Pierce said.
“While the amendment may have been well-intentioned to reduce retention and expedite the closing and payment of a project, I believe it falls short and may create more problems,” Pierce said.
This is because under recent changes, a homeowner could argue that they are allowed to withhold 10% withholding until the project is 50% complete and then no withholding on the remaining payments. This would allow owners to never exceed the global maximum limit of 5%, even though they retain more in relation to global termination.
The reason this is important is because contractors are still limited to retaining a maximum of 5 percent of their subcontractors, which has the potential to create an “accounting nightmare,” Pierce said.
He added that another problem is that while changes in the law allow a contractor to submit a final invoice upon reaching substantial completion of a project, the actual payment of the invoice is not due until 30 days after the approval of the invoice.
But that could create another payment gap, since these types of approvals typically don’t come until a project is complete and all closing paperwork is submitted. Finally, many property owners and developers may be unfamiliar with the law’s requirements, which can lead to inadvertent violations of the law and expose them to liability, Pierce added.
Late payments persist
Payment delays and transaction errors continue to plague the construction industry. The industry’s days sales outstanding, a national measure of how long a company waits to receive payment for its products or services, worsened to 94 days in 2023 from 90 days in 2022, according to a report by The Hackett Group, a Miami-based management consulting firm.
This results in workers missing paychecks, vendors not getting paid and projects being delayed for months, according to a Pymnts December 2023 analysisa media company focused on payments, fintech and financial services.
From that perspective, contractors could see the changes in New York law as a step in the right direction, said Tim Hegarty, a partner at Zetlin & De Chiara, a New York City-based law firm. York.
“I think [contractors] should take that as good news,” said Tim Hegarty, a partner at New York-based Zetlin & De Chiara. “Some may argue that it’s still possible to retain more than 5% of the contract,” but that’s still better than the ubiquitous 10% he used to withhold in the past, Hegarty said.
And, Hegarty said, contractors can receive final payment in New York today sooner than in the past. However, it’s not great news for property developers, he said.
“Typically, for practical purposes, it’s very common to reduce retention on construction projects as they progress. So it’s not unusual to have a 10% hold until we say 50% of the work is complete or 75% of the work is complete and then no other hold is held. More is then released when substantially completed and then the balance after final payment. That’s the way it used to work.”
The downside for contractors is that now, if retention is limited to 5%, owner-developers may begin to push for more specificity in documenting how far along a project is, which is captured in a document known as a program of values. Landlords could scrutinize those schedules much more in the wake of the changes, adding another hurdle for contractors.
“Another reaction from owner-developers could be to require more commercial contractors to obtain payment bonds and performance bonds, which would provide the owner-developer with some additional assurance that the contractor will not default and complete the performance of the contract.” Hegarty said. “Some of the smaller operations don’t qualify for bonds. That could be a potential negative for contractors.”
