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October 3, 2013

New city policy has contractors acting like banks

  • Seattle's standard contract for public construction work now requires contractors to pay their subcontractors even if the city hasn't paid them.
    Ashbaugh Beal


    In the last days of September, the city of Seattle announced dramatic changes to the prompt payment terms found in the city's standard contract provisions for public construction work.

    The city initially appeared ready to release the proposed changes on Oct. 1 for comment prior to enacting them on Jan. 1, 2014. But the city apparently scrapped those plans in favor of applying the new provisions to all bids and contracts entered on or after Oct. 1.

    The city's new provisions clash with state prompt pay laws in several key respects.

    The state prompt pay laws have an overarching structure that obligates public owners to promptly pay contractors for undisputed work; and for contractors, in turn, to promptly pay their subcontractors upon receiving payment from the public owner.

    The city's new prompt pay provisions diverge from this, requiring instead that contractors pay their subcontractors regardless of whether the contractors have received payment from the city.

    Further, the enforceability of these new provisions between contractor and subcontractor remains unsettled as these are contract provisions, not law.

    And while the new provisions aspire to regulate the payment obligations between general contractors, subcontractors, and lower-tier subcontractors and suppliers, the city's contract provisions disclaim any intent to monitor and enforce contractual obligations between these same parties and specifically refuse to confer any rights or obligations beyond the general contractor.

    Washington's prompt payment requirements are largely captured in three state laws.

    First, state law requires contractors and subcontractors to pay downstream subcontractors within 10 days of receiving payment for the downstream subcontractor's work. Contrary to this principle of paying subcontractors only after receiving payment from a public owner, the city's new provisions require general contractors and subcontractors to pay downstream subcontractors and suppliers within 30 days of satisfactorily completing work — regardless of whether the contractor or subcontractor has received payment for the work from the city.

    If the city hasn't paid for the work by day 30, general contractors and any subcontractors with lower-tier subcontractors or suppliers become financiers of the city's project.

    This same state law requiring prompt payment only upon receiving payment also allows contractors to withhold 150 percent of the value of disputed work. In contrast, the city's new provisions limit the amount withheld to only the value of the disputed work.

    Second, state law requires the city to make payment on properly completed invoices within 30 days. The city's prompt pay provisions do not account for this obligation, requiring contractors to make payment within 30 days regardless of whether the city has complied with its obligations under state law.

    Unless the city pays early — which seems exceedingly unlikely — contractors will be forced to pay subcontractors from their own funds.

    Third, state law requires the city to issue a change order for the full value of undisputed additional work. The city must do so within 30 days of the additional work's completion. Under the city's prompt pay provisions, however, the contractor has 30 days to pay for satisfactorily completed change order work and work performed pending change order documentation.

    Contractors will therefore have to wait for the city to issue the change order, then pay on the invoiced change order — a process that all but guarantees the contractor's obligation to pay subcontractors with its own money.

    Most troublesome of all: Because a contractor must pay for completed additional work regardless of whether the city has issued a change order, the contractor is at significant risk of paying for additional work that the city ultimately refuses to approve and pay for.

    In light of these new provisions, contractors must take steps to minimize the impact of the new contract provisions, including holding the city accountable for complying with state prompt payment requirements. The city's failure to pay within 30 days of receiving properly invoiced work makes the city liable to the contractor at 1 percent per month.

    By timely paying the subcontractor, the interest owed the contractor by the city provides some return on the contractor's loan to the city. But that's likely little comfort when compared to the much larger risk of paying for additional work that the city may never pay for.

    Contractors and subcontractors alike can also reduce their risk by making adjustments to their standard subcontracts. These adjustments might include giving precedence to subcontract provisions in incorporation clauses, defining and conditioning “satisfactory completion” on payment by the city, taking a closer look at the subcontract's payment provisions, and tying backcharge provisions to satisfactory completion.

    Tymon Berger is a lawyer in Ashbaugh Beal's Construction Law Group in Seattle.

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