New Virginia Law Bans Contingent Payment Provisions in Construction Contracts

By: Jackson S. Nichols and Nicholas F. Morello

A new bill has been signed into law in Virginia that prohibits the use of contingent payment provisions on construction projects. The new law amends VA ST §§ 2.2-4354 and 11-4.6 and provides that “[p]ayment by the party contracting with the contractor shall not be a condition precedent to payment to any lower-tier subcontractor, regardless of that contractor receiving payment for amounts owed to that contractor.” In other words, Virginia will no longer permit “pay-if-paid” provisions in construction contracts.

This change is surprising given Virginia’s reputation for allowing parties to negotiate and agree to almost any terms in a contract. This departure from that policy will remove a contractor’s and a higher-tiered subcontractor’s ability to use “pay-if-paid” or “pay-when-paid” provisions to shift the risk of an owner’s non-payment downstream to lower-tiered subcontractors. The law will become effective for all construction contracts signed after January 1, 2023.

In addition to the ban on contingent payment provisions, the amendments require any public contract to include a provision that makes a contractor liable for the entire amount owed to the subcontractor, except for “amounts otherwise reducible due to the subcontractor’s noncompliance with the terms of the contract.” If withholding funds for non-compliance, the contractor must provide the reason for withholding the funds in a written notice.

These amendments also enhance prompt payment protections for contractors in private contracts. The new law provides that in prime contracts, the owner shall pay the contractor within 60 days of an invoice of any undisputed portion of the work invoiced. Similarly, in a subcontract, the contractor must pay a subcontractor for undisputed portions of invoices “within the earlier of (i) 60 days of the satisfactory completion of the portion of the work for which the subcontractor has invoiced or (ii) seven days after receipt of amounts paid by the owner to the general contractor or by the higher-tier contractor.” The amended law extends the protection of the state’s prompt pay act to private contracts as well, providing that the “[f]ailure of a contractor to make timely payment as provided in this subsection shall result in interest penalties consistent with §?2.2-4355.”

The main takeaway for contractors and higher-tiered subcontractors is that it will be more important than ever to evaluate the financial condition and reliability of an owner on a project since, in the event of non-payment by the owner, contractors will now be liable for payment to lower-tiered subcontractors. Additionally, all contractors and subcontractors will need to review and revise their contracts to remove any contingent payment provisions.

With the new law coming into effect on January 1, 2023, contractors and subcontractors should start looking at their contracts, making necessary revisions, and understanding how those revisions affect their operations. If you are a contractor or subcontractor operating in Virginia and would like more information and help in determining how this bill affects your business, contact Jackson Nichols at 202.587.4756 or?[email protected], Nicholas Morello at 267.238.4720 or?[email protected], or the Cohen Seglias attorney with whom you work.