Prompt Payment Statutes Revisited by Bernard S. Kamine ECA Legal Counsel California has a fistful of prompt payment statutes designed to assure that contractors, subcontractors and design professionals timely receive progress and retention payments on both public and private works construction projects. Those statutes are a hodge-podge of varying provisions: Some prescribe penalties in addition to interest, some prescribe penalties in lieu of interest, some prescribe rates of interest, some allow attorney fees to the prevailing party, some apply only to undisputed invoices, some apply to the undisputed portion of invoices and some appear to conflict with others. Those statutes are also dispersed over the Civil Code, Public Contract Code, Government Code and Business & Professions Code. Two of the most powerful weapons to assure timely payment are a monthly charge for late payment and attorney fees to collect the money owed. The prompt payment statutes use these weapons, but use them inconsistently for only some payments to some people on some jobs. For example, on a state job, where the contractor or design professional is a small business (independently owned and operated California firm with not more than 100 employees nor more than $10,000,000 in average annual sales over the last 3 years; Gov. Code § 14837), the penalty is 0.25% per day (i.e., 7.5% for a 30-day month), in addition to normally recoverable interest. For all other contractors, the penalty is 1% more than the state's Pooled Money Investment Account earned the previous June 30. Today that would be about 3.5% per annum (see www.sco.ca.gov/ard). The state must pay the penalties without demanding an additional invoice for them from the contractor. (Gov. Code §§ 927.6 and 927.7) The interest payable in addition to the penalty is 10% per annum on contractor progress payments (Pub. Cont. Code § 10261.5), 2% per month on contractor retention (Pub. Cont. Code § 7107) and 1-1/2% per month on both progress and retention payments to a design professional (Civ. Code § 3320). The penalties only apply to totally undisputed invoices (Gov. Code § 927.3). However, the 2% per month interest on retention applies to money withheld in excess of 150% of any disputed amount. The contractor can recover attorney fees in the lawsuit for the 2% per month interest on retention, but not in a lawsuit for the 10% per annum interest on progress payments, nor one for penalties. On private jobs, there is a penalty of 2% per month for late progress payments, but owners pay that in lieu of interest (Civ. Code § 3260.1) while contractors paying other contractors pay it in addition to interest (Business & Professions Code § 7108.5 and Civ. Code § 3262). For late retention payments, the 2% is in lieu of interest for both owners and contractors (Civ. Code § 3260). The courts are beginning to make sense of these and other inconsistencies among the prompt payment statutes.
	Some Penalties Are in Addition to Interest Morton Engineering & Construction, Inc. v. Patscheck (2001) 87 CA4th 712, 104 CR2d 815, involved a public works project. Subcontractor Morton was not given the last progress payment or retention. After the lawsuit was filed, Patscheck offered the full amount owed under the contract, but no money for extra work, prompt payment penalties, prejudgment interest or attorney fees. The subcontractor rejected the offer and obtained a judgment for everything. The appellate court affirmed, holding (87 CA4th at 717-18): "We do not agree with Patscheck that allowing recovery of prejudgment interest (Civ. Code, § 3287) and the 2 percent penalty would result in a double recovery for the subcontractor. Patscheck ignores the distinct purposes of the two items of recovery. Prejudgment interest is intended to compensate the subcontractor for loss of use of the funds. (citation) The 2 percent penalty is intended to penalize the contractor for failing to comply with statutory requirements. To preclude recovery of both the 2 percent penalty and prejudgment interest would defeat the purpose of the statute and reduce the impact of the 2 percent penalty. If the Legislature had intended this result, it would have so stated. (See, e.g., Pub. Contract Code, § 7107.). The statute the court relies upon, Business & Professions Code § 7108.5, applies to progress payments from one contractor to another on any job public or private. The same provisions also appear in Public Contract Code § 10262.5 (duplicating the coverage for state projects) and in Business & Professions Code §7108.6 (covering contractor payments to "a duly authorized motor carrier of property in dump truck equipment"). The logic of Morton should also apply to the penalties against state agencies for failure to make timely progress and retention payments (Gov. Code § 927 et seq.). However, it will not apply to retention payments on other public works or on private works, because the statutes applicable to those payments call for a penalty in lieu of any interest otherwise due (2% penalty for contractor to contractor on public works, Pub. Cont. Code § 7107; 2% penalty for contractor to contractor on private works, Civ. Code § 3260; 1-1/2% penalty for public agency to design professional and design professional to subconsultant on both public and private works, Civ. Code §§ 3320 and 3321). Amount in Dispute for 150% Withhold Determined on Initial Payment Due Date In Denver D. Darling, Inc. v. Controlled Environments Construction, Inc. (2001)89 CA4th 1221, 108 CR2d 213, prime contractor Controlled contended that subcontractor Darling failed to meet specifications for the flatness of concrete loading docks on a private works project. When the dispute arose, Controlled estimated the cost of repair at $32,394, but withheld all of the $101,580 retention. At trial Controlled's estimate had risen to $100,000 to $300,000. The trial court found that Darling had met the specifications, but refused to award any interest penalty or attorney fees under Civ. Code § 3260, because of the bona fide dispute over the specifications. The appellate court reversed, holding (1) that the bona fide dispute safe harbor applies only to the value of the disputed work, and (2) that the value of that work must be determined within 10 days after the owner pays retention. The prime contractor can only withhold 150% of the value of the disputed work as it exists on that date.
			Any withholding in excess of that amount is not part of a bona fide dispute, so the 2% per month charge in lieu of interest is recoverable on that excess, plus attorney fees to collect it. Although Denver D. Darling involved subcontractor retention on a private job, its logic should apply to subcontractor retention on public works though the value determination date will be 7 days, instead of 10 days, after the owner pays retention (Pub. Cont. Code § 7107). The Denver D. Darling logic should also apply to retention payments from an owner to a prime contractor though the value determination date will be 45 days after completion on private works (Civ. Code § 3260) and 60 days after completion on public works (Pub. Cont. Code § 7107). Also, the Denver D. Darling logic should apply to withholdings from subcontractor progress payments on both private works and public works (B& P Code § 7108.5 and Pub. Cont. Code § 10262.5), with the value determination date being 10 days after the owner makes the progress payment. Bond Surety Liable for Prompt Payment Penalties Washington International Insurance Company v. Superior Court (G. K. Backlund, Inc.) (1998) 62 CA4th 981, 73 CR2d 282, holds that the prime contractor's payment bond surety on a public works project is liable, under Public Contract Code § 10262.5, for the 2% per month prompt payment penalty, (1) because the statutes mandating the bond require it to cover "the full amount of [the subcontractor's] claim" (Civ. Code § 3226), including the claim for prompt payment penalties, and (2) because "all applicable laws in existence when a contract is made become a part of the contract as fully as if incorporated by reference," so a bond assuring full performance of the subcontract includes the statutory penalties for failing to make prompt payment. That second reason should make all of the prompt payment statutes a part of every bond that assures full performance of a contract. No Prompt Payment Penalty for Money Withheld for Stop Notice In Breda Construzioni Ferroviarie, SPA v. Los Angeles County Metropolitan Transportation Authority (1997) 56 CA4th 1433, 66 CR2d 416, over $4 million was withheld pursuant to a stop notice. MTA had the money in an interest bearing account. By the time a stop notice release bond was posted, over $600,000 in interest had been earned on the money. MTA refused to pay the interest. Breda sued, claiming the money was an undisputed amount, so 10% interest was due under Public Contract Code § 20104.50. MTA claimed it could keep all of the interest as the cost for its services as a stakeholder. The court ruled against both of them, stating "a public entity's retention of interest earned by funds held under a stop notice is unconstitutional whether or not authorized by statute" and "a pay request denied because of a stop notice is not 'undisputed.' So, Breda got the $600,000 that MTA had earned on the withheld money, not the larger amount that 10% interest would have produced. Although Breda involved a withhold from progress payments, its logic should apply to bar the 2% per month charge on retention money (Pub. Cont. Code § 7107) withheld to cover a stop notice. Also, though Breda involved a public works job, its logic should also bar the 2% per month charge in lieu of interest (Civ. Code §§ 3260 and 3260.1) for money withheld pursuant to a stop notice on a private works job.