A Summary of Oregon Senate Bill 906A: Prompt Payment Act for Private Projects
April, 2004
Oregon Senate Bill (SB) 906A is a comprehensive bill addressing many aspects of the construction industry including, but not limited to, creating a new construction contractor license class for property owners/developers, licensing for electrical installers and the establishment of a Residential Structures Board and Mechanical Board. SB 906A also sets forth certain prompt payment provisions which—as of January 1, 2004—must now be included in construction contracts for private projects.
This eAlert outlines SB 906A: its scope, provisions, and impact upon contract drafting. Property owners/developers/general contractors should be aware that interest penalty and attorneys fees are possibly at stake if the prompt payment provisions in SB 906A are not adhered to.
Effective Date and Scope of Prompt Payment Act1
As referenced above, the prompt payment provisions discussed herein apply to construction contracts negotiated on or after January 1, 2004. As for the types of contracts, or projects, that are subject to these provisions, SB 906A excludes all public contracts and contracts for all residential structures to the extent said residential structures are three stories or less above grade.
In other words, the prompt payment provisions in SB 906A apply only to contracts relating to the construction, alteration or repair of commercial structures and to the construction, alteration or repair of residential structures with more than three floors above grade (i.e., contracts for most single-family residences would be excluded).
Billing Cycle/Prompt Payment – Contract Between Owner and Contractor
The following are the relevant provisions of SB 906A as they relate to prompt payment provisions in contracts between owners and general contractors:
- On projects lasting more than 60 days, progress payments are required to be on a 30-day billing cycle;
- Once a contractor's billing is approved and certified, payment from the owner is due 14 days after the billing from the contractor is received;
- An owner can refuse to approve all or a portion of a billing by issuing a written statement within ten days after receipt of a billing stating the grounds for the disapproval which include, but are not limited to, unsatisfactory or defective work, the existence of third-party claims or on other grounds as provided in the contract;
- If a billing is not objected to within the ten-day period, it will be deemed to be approved and certified and payment must be made in the next four days;
- These billing cycles, certification and other payment timelines can be extended (but not shortened) by the parties, but such extended timelines must be clearly and conspicuously set forth in the contract documents;
- Interest Penalty - Regardless of what billing cycles/payment timelines are established for a particular contract, if prompt payment is not made within the time provided, the contractor may be entitled to receive an interest penalty on the amounts outstanding at a rate of 18% per annum (or higher if otherwise agreed) until such amount is paid;
- Attorney Fees - If an action, claim or arbitration is initiated to recover an overdue payment and/or interest on an overdue payment, the prevailing party is entitled to recover its attorneys fees incurred in recovering the same; and
- Non-Waiver - SB 906A clearly states that the parties to a contract subject to the prompt payment provisions may not alter the right of any contractor, subcontractor or supplier to receive prompt and timely payments.
Prompt Payment – Contracts Between Contractor and Subcontractors and Material Supplier
The following are the relevant provisions of SB 906A as they relate to prompt payment provisions in contracts between general contractors and its subcontractors and/or material suppliers:
- Once a subcontractor or supplier provides a billing or invoice in compliance with its contract and provides an appropriate lien waiver/release, and assuming the subcontractor or supplier performed in accordance with its contract, it shall be entitled to receive payment within seven days for the full amount received for such subcontractor's work or for materials received by the contractor from the owner;
- If a certain amount is withheld from a subcontractor or supplier by the contractor, the contractor has the option of omitting this amount from its billing to the owner2;
- Interest Penalty/Attorney Fees – Consistent with provisions governing contracts between owners and contractors, if prompt payment is not made to a subcontractor or supplier, the subcontractor or supplier may be entitled to recover an interest penalty of 18% per annum on the outstanding amounts. To the extent an action, claim or arbitration is initiated to collect a payment and/or interest penalty, the prevailing party is entitled to recover its reasonable attorneys fees.
Impact on Contract Drafting
Regarding the establishment of billing/payment cycles between the contractor and owner and between the contractor and its subcontractors, SB 906A provides default time periods for billing, certification, approval and payment. SB 906A, however, does allow the parties to contract for longer periods if longer periods are appropriate. What SB 906A does not allow is for the contractor, subcontractor or material supplier to waive their statutory right to receive prompt payment and to collect an interest penalty and attorneys fees if they ultimately prevail on a claim for a disputed payment.
Bullivant Houser Bailey PC's Construction & Development Group is dedicated to helping our clients succeed in every phase of development and construction. Our team of attorneys represent owners (both public and private), developers, contractors, sureties, subcontractors, vendors, suppliers and insurers. For in-depth information about Senate Bill 906A and the impact it could have on your business, please contact Tim Calderbank (503.499.4642) or Howard Carsman (503.499.4425).
Notes
(1) SB 906A at Section 57 also addresses the inclusion of mandatory contract provisions relating to the suspension and termination of the work.
(2) As with the owner, a contractor can determine to withhold payment from a subcontractor or a supplier if there are defects in the work or materials, if there are third-party complaints relating to such work or materials or if there are other grounds as stated in the subcontract or purchase order.