LB 552 - The Nebraska Construction Prompt Pay Act

Summary

The Nebraska Unicameral enacted the Nebraska Construction Prompt Pay Act ("the Act") in order to address the issue payment to contractors and sub-contractors on commercial construction projects. LB 552, Jan. 21, 2010. The Act governs applies to contracts for construction entered into on or after October 1, 2010, except construction contracts involving residential property of no more than four (4) units, the State of Nebraska or state agencies. The Act contains significant provisions affecting (1) construction contracts involving political subdivisions, (2) construction contracts involving private parties, (3) acceptable reasons for withholding payment (retainage), and (4) contract clauses declared against public policy. Finally, the Act provides a remedy in the form of interest due at a rate of 1% per month, 12% annum for violations of the Act.

Click here for the full text version of the Nebraska Construction Prompt Pay Act

Click here to see FAQ regarding the Nebraska Construction Prompt Pay Act

Construction Contracts Involving Political Subdivisions

Under the Act, all "claims" against a political subdivision must be submitted in writing to a designated office of the political subdivision within 180 days of the substantial completion of the project. Then, the political subdivision must approve or deny the claim within 90 days. Once a claim is approved, it must be paid within 30 days. If no action is taken by the political subdivision within 90 days the claim is deemed denied. Once a claim is either denied or deemed denied, a contractor may file a lawsuit.

Construction Contracts Involving Private Parties

The Act establishes a thirty (30) day requirement for payment to contractors once an owner or an owner's representative, such as an architect or construction manager, receives a properly prepared payment request for work performed under a construction contract. The Act establishes a ten (10) day requirement for payment to subcontractors once the Contractor or Subcontractor receives payment from the Owner/Contractor. Also, a subcontractor must pay its suppliers and subcontractors within ten (10) days.

The remedy for late payment in all cases is interest due that accrues at a rate of one percent (1%) per month beginning on the day following the due date, equal to a 12% A.P.R. Despite the statutory remedy, a party seeking to collect interest due under the Act must notify the party responsible for making payment of the statutory remedy in order to prosecute such a claim. Further, any acceptance of payment by a contractor due interest under the act waives all claims for interest due under the Act on the amount of the accepted payment.

Retainage - Acceptable Reasons for Withholding Payment

The Act limits the acceptable reasons for withholding payment on a construction contract to the following five (5) situations.

1. Until substantial completion of the construction project, retainage may be withheld in an amount specified in the contract;

2. After substantial completion of the construction project, an amount not exceeding 125% of the estimated cost to complete the contractor's work may be withheld;

3. A reasonable amount may be withheld if completion date will not be met;

4. A reasonable amount may be withheld if third party claims have been filed, or it is reasonable to believe such claims will be filed; and

5. A reasonable amount may be withheld if the party due payment has failed to make timely payments to its contractors or suppliers.

Notably, the Act makes no specific provision for withholding of payment to a contractor for faulty workmanship. Because the Act generally allows for contract language directed at withholding payment, it is likely that with specific language one could limit any payment due to the contractor in such a situation.

In any case, if a court finds that a contractor or subcontractors' payment was improperly withheld, interest will be due at a rate of 1% per month, 12% per annum accruing from the date payment was due.

Contract Clauses Declared Against Public Policy

The Act declares three (3) specific contract clauses as against public policy in construction contracts and therefore unenforceable in Nebraska courts. First, choice of a venue other than Nebraska in either civil suits or arbitration proceedings. Second, choice of law other than Nebraska in any legal proceeding related to a construction contract. Finally, any waiver of a claim for payment by a contractor, except for the amount of payment already received.

FAQ

Who is an "owner" under the Act?

A person, an entity, or any political subdivision "(a) who has an interest in any real property improved, (b) for whom an improvement is made, or (c) who contracted for an improvement to be made..."

Who is a "contractor" under the Act?

"individuals, firms...corporations, or other associations of persons engaged in the business of the construction, alteration, repairing, dismantling...of buildings, roads, bridges, viaducts, sewers, water and gas mains, streets, disposal plants, water filters, tanks and towers, airports, dams, levees and canals, water wells, pipelines, transmission and power lines, and every other type of structure...or improvement coming within the definition of real property and personal property, including...such property to be held either for sale or rental."

What is the period for an owner to pay a contractor under the Act?

When work has been performed and a payment request has been received, payment shall be made to the Contractor, pursuant to the contract, within thirty (30) days.

What is the period for a contractor to pay a subcontractor under the Act?

When work has been performed and all conditions precedent to payment have been satisfied the contractor shall pay the subcontractor and the subcontractor shall pay its subcontractors:

1. Within ten (10) days after receipt by the contractor or subcontractor of each periodic or final payment; and

2. The full amount received for the subcontractor's work and materials.

When can I withhold payment from a contractor/subcontractor?

"When work has been performed pursuant to a contract, a party may only withhold payment"

1. In an amount specified in contract may be withheld until the work is substantially complete.

2. Payment of a reasonable amount may be withheld to the extent that such withholding is allowed in the contract for any of the following reasons:

a. There is reasonable evidence that the completion date will not be met; or

b. There is reasonable evidence that a third party claim has been or will be filed with respect to work under the contract; or

c. Failure of contractor to make timely payments for labor, equipment or materials.

3. After substantial completion, a party may only withhold an amount not more than 125% of the estimated cost to complete the remaining work on the contract.

What do I have to do to collect interest for a late payment?

A claim in court can be filed to recover interest due under the Act, however, interest is due under this provision only after the person charged the interest has been notified of the provisions of the Act by the contractor or subcontractor seeking to collect interest for late payment.

How does the Act affect political subdivisions?

If a payment from the political subdivision to a contractor or subcontractor is not paid within thirty (30) days after approval of claim for payment (90 day period to approve) then interest is due beginning on the day following the payment due date at the rate of one percent (1%) per month.

When does this Act go into effect?

The Act goes into effect on October 1, 2010.

What contracts does this Act affect?

The Act governs all commercial construction contracts entered into on or after October 1, 2010.

What if I am owed $100, but I receive a payment of $25 two months late?

Under the Act, if you accept payment you waive any claim for interest on that payment. Therefore, in this situation if you accept the payment of $25, then you would waive any claim to interest on that $25, but would still have a claim for interest on the $75.

Do any other states have a "prompt pay" law?

Yes, Wisconsin, Alabama, Tennessee, Georgia, New York, Illinois, Arizona all have some version of a "prompt pay" law.