In 2006, New Jersey enacted the “Prompt Payment Act,” codified at N.J.S.A. § 2A:30A-1, et seq. (the “Act” or “PPA”).  The Act requires the prompt payment of contractors, subcontractors, sub-subcontractors, and material suppliers, and applies to all public and private contracts entered on or after September 1, 2006, to improve real property within the State of New Jersey.

Under the Act, “improve” is broadly defined as: to build, alter, repair or demolish any structure upon, connected with, on or beneath the surface of any real property; to excavate, clear, grade, fill or landscape any real property; to construct driveways and private roadways on real property; to furnish construction related materials, including trees and shrubbery, for any of the above purposes; or to perform any labor upon a structure, including any design, professional or skilled services furnished by an architect, engineer, land surveyor or landscape architect licensed or registered pursuant to the laws of this State.  N.J.S.A. § 2A:30A-1.

Definitions & Deadlines for Payment

Contractor/prime contractors (commonly known or referred to as general contractors) are defined under the Act as a person or entity contracting with an owner to improve real property.  Payments to contractors are due within 30 calendar days after the billing date for work that has been approved and certified by the owner or the owner’s authorized approving agent.  N.J.S.A. § 2A:30A-2(a).  The billing shall be deemed approved and certified 20 days after the owner receives it unless the owner provides, before the end of the 20-day period, a written statement of the amount withheld and the reason for withholding payment.  Id.; see also Coarc Co. Elec. Contractors v. Sanzari Asphalt Maint., No. A-2590-20, 2022 N.J. Super. Unpub. LEXIS 810, at *5 (App. Div. May 16, 2022) (holding that verbal conversations are not an exception for establishing compliance with the PPA’s written statement requirement).

A subcontractor is defined under the Act as a party who contracts to provide labor, material, or other services to a prime contractor, and a sub-subcontractor is one providing the same to a subcontractor.  Payments to subcontractors and sub-subcontractors are due, unless otherwise agreed in writing, within 10 calendar days of the prime contractor’s (or subcontractor’s) receipt of payment for the work performed and accepted by the owner or the owner’s authorized approving agent or the prime contractor, as applicable.  N.J.S.A. § 2A:30A-2(b).

Consequences & Penalties for Late Payment

Failure to adhere to the Act’s deadlines for payment can result in significant consequences.  First, interest, at a prime rate plus 1% for the duration of the late payment, is added to any amount owing under the contract.  N.J.S.A. § 2A:30A-2(c).  Second, the prevailing party is entitled to reasonable costs and attorneys’ fees under a civil action brought to collect payment under the Act.  N.J.S.A. § 2A:30A-2(f).  It is important to emphasize, that despite the amount due and owing under the relevant contract, there is no “proportionality requirement” in the attorney’s fee provision of the Act, meaning that the award of attorney’s fees can be significantly higher than the amount of the recovery sought by the contractor.  See JHC Indus. Servs., LLC v. Centurion Cos., Inc., 469 N.J. Super. 306, 315 (App. Div. 2021) (finding that the trial court erred in rejecting plaintiff’s attorney’s fee request for $104,670 expended to recover $30,500 owed under the terms of the contract based solely on the proportionality of the fees to the recovery sought).

Third, an unpaid contractor or subcontractor can stop work seven days after it provides notice to the owner of violation(s) under the Act.  N.J.S.A. § 2A:30A-2(d).

Defenses & Notes

It is important to note that the Act requires all subject contractors to include a provision in its contracts providing that payment disputes must be submitted to mediation and/or arbitration. N.J.S.A. § 2A:30A-2(f).

Additionally, all contractors should be aware that the Act states that, to be entitled to payment, a prime contractor must have performed “in accordance with the provisions of contract with the owner.”  N.J.S.A. § 2A:30A-2(a).  This provision allows an owner to argue that the contractor did not do its work correctly or as proscribed by the contract, thus potentially avoiding liability under the Act.  Therefore, contractors should be weary of including broad and undefined terms and conditions when contracting with parties.