When a business performs work or delivers materials to another company, it is a deeply embedded American and global principal that the furnishing business should get paid in a timely manner. When businesses are forced to wait for payment, it puts a major strain on their working capital, which in turn makes it difficult for them to pay their employees and continue contributing to the economy.
Unfortunately, it is all too common for companies to leverage their size and position to stretch the working capital of other companies. This is reported on frequently in the press. Consider, for example, this New York Times article: Big Companies Pay Later, Squeezing Their Suppliers; or this article from the Wall Street Journal: Small Firms’ Big Customers Are Slow To Pay.
This problem has commanded the attention of law makers and courts for generations. Most recently in America, President Obama has stressed putting more working capital into the hands of suppliers and small businesses through a White House initiative called “SupplierPay.”
SupplierPay, however, is just one approach to the overall slow payment and working capital problem. As we explored in a previous article, the SupplierPay initiative actually fails the construction industry. And as Ami Kassar wrote in a WSJ op-ed, it also may fail most small businesses and needs to be put “on steroids.”
The construction industry presents a unique and highly challenging working capital problem. Large enterprise companies are supplying materials on credit to less-capitalized smaller contractors, who in turn, are providing those materials and additional labor to large well-capitalized general contractors with complicated payment terms.
The construction industry circumstances have given rise to “Prompt Payment” laws, which mandate that cash be paid down the construction contracting chain within certain timeframes.
Generally speaking, these timeframes are short (i.e. 7-14 days), and they begin to count from when the party responsible for paying has received their own payment.
For those receiving payment, it’s important to understand the prompt payment regulations because it impacts when they are entitled to receive payment for a project. This can influence how the receiving party makes cash flow projections, as well as when the company may get more aggressive in its debt collection efforts.
For those making payment, the prompt payment laws are important because they can result in stiff consequences if they are overlooked. These laws can provide receiving parties stiff penalties and the ability to recover attorney fees. Sometimes, in fact, a payment can be entitled to significant percentage increases (i.e. 15%) if it is merely a day late.
The trouble with prompt payment laws is the same trouble that plagues nearly every law related to the construction industry; that is, the laws and regulations vary significantly by circumstance, state, project type, and more.
zlien has published comprehensive resources on the prompt payment laws across the United States to provide owners, general contractors, subcontractors, and suppliers the information they need to make and receive payments without any turbulence.