Taking Effect on July 1, 2023: Revisions to Virginia’s Prompt Payment Law and the Statute Prohibiting the Application of Pay-if-Paid Clauses

During the 2022 Session, the Virginia General Assembly passed SB 550, which prohibited the application of contingent payment clauses (known as “pay-if-paid” clauses) under most circumstances. The bill also established prompt payment clauses for prime contracts and subcontracts on private projects. Virginia’s Prompt Payment Act was formerly applicable only to public projects.

The legislative process during the 2022 session did not result in a consensus among stakeholders concerning the appropriate statutory language. This is a link to the final language of the bill, which was very different from the original bill, or the first substitute presented in committee. The bill was extensively amended by the House committee, and the Governor proposed a substitute bill that incorporated several changes. In the rush to pass a bill. there were several inconsistencies and problems with the compromise language adopted in 2022.

The final version of the bill included a delayed enactment clause so that the statutory changes in it did not take effect until January 1, 2023. The purpose of this delay was to allow time for stakeholders to work towards agreement on revisions to the new statutory language addressing the bill’s numerous ambiguities and inconsistencies.

SB 550 required that the Department of General Services and the Office of the Attorney General convene a Public Body Procurement Workgroup. In the Summer of 2022, the workgroup met to discuss recommended changes to the language adopted by SB 550. The workgroup voted for recommendations on technical amendments to SB 550 to address inconsistent and confusing language. The workgroup supported the following changes:

• Clarify whether A/E, design, and professional services contracts are covered by the new statutory language.
• Make definitions such as “construction,” “construction contract,” “general contractor,” and “subcontractor” uniform in their application to both public and private projects.
• Create consistency in language related to when a contractor is not liable to pay a subcontractor for noncompliance and breach of contract.
• Use the same language related to notice for nonpayment for both public and private construction contracts.
• Create consistency between the payment timelines in private contracts by copying the terminology in subsection B of § 11-4.6 (payment from owner to GC) and using it in subsection C (payment from GC to subcontractor, subcontractor to subcontractor, etc.).

The workgroup’s recommendations resulted in HB 2500.  The changes adopted by the passage of HB 2500 took effect on 7/1/2023. These changes include:

Virginia Code § 2.2-4347

• Added a new definition of “construction contract.”
• Added “general contractor” as a defined term alongside “contractor.”
• Other non-substantive cleanup changes to the definition language.

Virginia Code § 2.2-4354

• Added “in the event that the contractor has not received payment from the state agency or local government for work performed by a subcontractor under such contract” to the first sentence of paragraph 1.
• Also added “and to pay such subcontractor within 60 days of the receipt of an invoice following satisfactory completion of the work for which the subcontractor has invoiced,” to the first sentence of paragraph 1.
• There were several other changes to paragraph 1 intended to provide consistency between Virginia Code § 2.2-4354 and Virginia Code § 11-4.6.
• If the contractor withholds all or part of the payment invoiced, the contractor shall notify the subcontractor within 50 days of receipt of the invoice, in writing, of the intention to withhold and the reason for nonpayment, “specifically identifying the contractual noncompliance, the dollar amount being withheld, and the lower-tier subcontractor responsible for the contractual noncompliance.”
• Added at the end of the paragraph 1 exceptions for retainage and contracts awarded solely for professional services as that term is defined in Virginia Code § 2.2-4301 where the public body is contracting directly with an architectural and engineering firm.

Virginia Code § 11-4.6

• The definitions in paragraph A were modified to match the definition in Virginia Code § 2.2-4347, with the exception from Virginia Code § 2.2-4354 applicable to contracts awarded solely for professional services as that term is defined in Virginia Code § 2.2-4301 where the public body is contracting directly with an architectural and engineering firm.
• The definition of contractor or general contractor was changed to reference the definitions in Virginia Code § 54.1-1100, the contractor licensing statute.
• There is also a separate definition of subcontractor that references the definition in Virginia Code § 2.2-4347.
• New paragraph B(1) (formerly B) concerning prompt payment terms as between an Owner and Contractor was modified to follow the prompt payment terms in new paragraph B(2) (formerly C). The Owner must notify the Contractor within 45 days of the receipt of an invoice of its intention to withhold all or part of the invoice, specifically identifying the contractual noncompliance and the dollar amount being withheld.
• New paragraph B(2) (formerly C) was modified to remove references to higher tier and lower tier contractors and inserting references to the general contractor and subcontract. The 60-day payment window runs from the “receipt of an invoice following satisfactory completion of the portion of the work for which the subcontractor has invoiced.”
• The right to withhold payment now arises from “subcontractor’s noncompliance with the terms of the contract,” rather than “breach of contract.”
• The GC must notify the subcontractor within 50 days of receipt of an invoice, in writing, of its intention to withhold payment, and specifically identifying the contractual noncompliance, the dollar amount being withheld, and the subcontractor responsible for the contractual noncompliance.
• A new line was added to clarify that these prompt payment, notice, and interest provisions flow down to subcontracts between subcontractor and a lower tier subcontractor or supplier, but only if the project is not a single-family residential project, and the value of the project, or an aggregate of projects under such construction contract, is greater than $500,000.
• This is a subtle change that will have a dramatic effect. The original language from SB 550 included the exceptions from the “wage theft” law in Virginia Code § 11-4.6 [formerly subparagraph G, now subparagraph C(4)]. The former language provided an exception from the application of the entire code section if “the construction contract is related to a project other than a single family residential project, and…the value of the project, or an aggregate of projects under one construction contract, is greater than $500,000.”
• Under this new exception language does not apply to lower tier subcontracts if the value of the project is less than $500,000.
• The remaining changes to Virginia Code § 11-4.6 are non-substantive cleanup changes.

The prohibition against pay-if-paid clauses remain in effect, with the limited exceptions from SB 550 (“the party contracting with the contractor is insolvent or a debtor in bankruptcy as defined in [Virginia Code] § 50-73.79”).

The revised language adopted by HB 2500 is an improvement over SB 550, but even this revised language will not solve issues like non-payment for work that is performed subject to a change order rejected due to a dispute over whether the work is an extra or falls within the contract scope. Subcontractors and lower-tier subcontractors still run the risk of non-payment if the owner goes bankrupt or is insolvent, as do lower-tier subcontractors on projects with a value of less than $500,000. With the revised language taking effect this week, now is the time to discuss with your counsel whether your contracts and subcontracts comply with the revised statutory language.