U.S. Supreme Court Justice Louis Brandeis famously referred to states as the “laboratories of democracy.” The Texas legislative process is an unusual laboratory compared to most states. The Texas Legislature only meets once every two years in regular session from January to May. The 88th Regular Session of the Texas Legislature concluded in June 2023 and the next Regular Session commences in January 2025.

This pattern leads to an influx of new laws every other year, most taking effect on September 1 or January 1. The 87th Regular Session in 2021 enacted several major laws impacting the Texas construction industry, including substantial modifications to the Texas statutory mechanic’s lien system contained in Chapter 53 of the Texas Property Code.

The 88th Regular Session was less impactful but included several new laws and amendments impacting the construction industry. One of these was an amendment to the Texas Prompt Pay Act in Chapter 28 of the Texas Property Code applicable to private projects and Chapter 2251 of the Texas Government Code appliable to public projects.

For private construction projects, the Texas Prompt Pay Act obligates project owners to timely pay all payment applications no more than 35 days from receipt (or five days from receipt of loan funds to be utilized for construction). TEX. PROP. CODE § 28.002. It similarly obligates general contractors and subcontractors to make payments to lower-tier subcontractors and suppliers within seven days from receipt of funds. TEX. PROP. CODE § 28.002. Payments may be withheld in the event of a “good faith dispute,” which is the source of considerable litigation. TEX. PROP. CODE § 28.003. If there is no good faith dispute or other basis for withholding, a party may be liable for one and one-half percent (1.5%) interest per month and 18% interest per year for unpaid amounts. TEX. PROP. CODE § 28.004.

For public contractor projects, Chapter 2251 of the Texas Government Code imposes similar requirements and obligates vendors (those entities contracting with the governmental entity) and subcontractors to pay lower-tier subcontractors and suppliers within 10 days of receipt of funds. TEX. GOV’T CODE §§ 2251.021-23. Interest on overdue payments is calculated based on the prime rate in effect on July 1 of the preceding year plus 1%. TEX. GOV’T CODE §§ 2251.025-29. Payments may be withheld pursuant to certain procedures if a “bona fide dispute” exists. TEX. GOV’T CODE § 2251.051.

In 2023, the Texas Legislature added Section 28.0091 to the Texas Property Code and Section 2251.0521 to the Texas Government Code to address “Unsigned Change Orders.” These new provisions provide express statutory authorization for contractors or subcontractors to refuse to proceed with additional work directed by an owner if:

1. the contractor or subcontractor has not received a written, fully executed change order for the owner-directed additional work; and
2. the aggregate actual or anticipated value of the additional work plus any previous owner-directed additional work for which the contractor or subcontractor has not received a written, fully executed change order exceeds 10 percent of the contractor’s or subcontractor’s original contract amount.

TEX. PROP. CODE § 28.0091 (a) (emphasis added). See generally TEX. GOV’T CODE § 2251.0521 (the definitions in the Texas Public Prompt Pay Act utilize the phrase “vendor” and contain additional terms applicable to projects for public entities but the statutory defense language is similar).

The new legislation expressly provides that a contractor or subcontractor refusing additional work without a signed change order is not responsible for damages associated with the election not to proceed. TEX. PROP. CODE § 28.0091 (b); TEX. GOV’T CODE § 2251.0521 (d). This creates a strong defense for contractors and subcontractors that did not exist previously under Texas law.

This new provision is designed to encourage parties to more efficiently collaborate on the inevitable change order process throughout projects. This encourages owners to act more swiftly and provides more leverage to contractors and subcontractors during a project with significant design or other issues causing change orders and proposed change orders.

Texas courts have not yet interpreted this new provision but questions already abound about this latest experiment in the democracy lab. The phrase “anticipated value” is subject to interpretation by each party to the project. There is also no guidance on which party is the final decision maker on the “aggregate actual or anticipated value.” As always, the initial decision maker will play a critical role regarding these issues for projects governed by the AIA documents.

The amendments took effect on September 1, 2023 and apply to contracts entered into on, or after that date.