Virginia has joined a small group of states that prohibit the inclusion of pay-when-paid clauses in private and public construction contracts. There are, however, some important ambiguities in the new legislation.

For this reason, businesses that provide services as contractors or subcontractors should carefully consider the new law when negotiating future contracts in Virginia on or after January 1, 2023, when it takes effect.

What Contractors and Subcontractors Need to Know

Senate Bill 550 was enacted on April 27, 2022 after being approved by the Virginia legislature on March 10, 2022. SB550 amends a portion of the Virginia Prompt Payment Act (Va. Code § 2.2-4354) and a portion of Virginia’s “wage theft” statute (Va. Code § 11-4.6). The law prohibits the use of pay-when-paid clauses in construction contracts between general contractors/higher-tier contractors and subcontractors and applies to contracts awarded by state or local government agencies as well as private contracts that include at least one general contractor and one subcontractor.

Pay-when-paid clauses are intended to protect general contractors from the risk of nonpayment by the owner. They do this by allowing contractors to wait to pay subcontractors until they themselves have been paid by the project owner. Under Virginia’s new law, however, construction contracts must include a provision whereby the project owner is required to pay their contractor no later than 60 days after receiving an invoice. Similarly, subcontracts must include a provision that requires contractors to pay their subcontractors within the earlier of 60 days after the subcontractor’s invoice submittal or seven days after receipt of amount paid by the owner or higher-tier contractor.

While the law does not alter a contractor or owner’s right to withhold payment due to nonconforming work and failure to adhere to contract terms, it does protect subcontractors from the risk associated with nonpayment at levels above their contract.

The legislation is poorly drafted, with ambiguities and holes for contractors to work around the statute. For example, the penalties associated with violating the statute are set at 1% per month on the unpaid amounts unless the contract provides otherwise. This leaves open the possibility that a contractor could insert a ridiculously low interest rate for late payment in its contracts and essentially eliminate the impact of the statute. Further, while the language of SB550 makes clear that construction contracts must include a provision requiring a contractor to notify their subcontractor of their intent to withhold payment, the language does not specify a timeline for the notice provision or whether there should be any consequences for a contractor’s failure to provide notice. The law is also silent when it comes to its application in contracts with a choice-of-law provision. For example, does the prohibition apply to a contract on a Virginia project that is governed by the laws of a state that does not require similar payment provisions.

As always, clients are strongly encouraged to have their contracts reviewed by experienced construction counsel – especially following the enactment of any new legislation.

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