The New Massachusetts Construction Prompt Pay Law

1. The New Massachusetts Construction Prompt Pay Law

2. Special Thanks Proud Corporate Sponsor

3. Panelists John Romeo, Director, Capital Construction, Boston College Nancy May, Vice President for Facilities, Northeastern University Jeff DeMarco, Partner, Campanelli Companies Charles Buuck, Senior Vice President, Turner Construction Steve McDonald, President, Erland Construction Mike Powers, Principal, Symmes Maini & McKee Associates Deborah Griffin, Partner, Holland & Knight LLP Robert Lizza, Partner, Hinckley, Allen & Snyder LLP Tim Bonfatti, President, Compass Project Management

4. Brief History Of The Legislation • After 1996 lien law reform, ASM pressed for limits on pay-if-paid • Compromise negotiated between ASM and AGC/Mass passed by Legislature in 2004 – Governor Romney vetoed • 2007 ASM added payment processing, change order processing, and right to suspend • Meanwhile, several states pass Prompt Pay statutes

5. Brief History Of The Legislation • ASM and AGC working groups met in 2008 and 2009 • April 2010: ASM filed new, streamlined bill • July 8, 2010: House passed ASM bill • July 2010: AGC and ASM negotiated revisions following which AGC voted to “not oppose” amended bill • July 31, 2010 Senate passes amended bill; August 10, 2010 Governor Patrick signs into law

6. Contracts Affected • Statute takes effect November 8, 2010 • Applies to prime contracts signed on or after November 8, 2010 - Owners as well as contractors and subcontractors affected • Applies to all subcontracts of any tier under those prime contracts • Applies to all projects with prime contracts with an original value of $3 million or more, but not residential projects of 1-4 units • All contracts, subcontracts, purchase orders eligible for rights under Mass. lien law, Ch. 254

7. Law Addresses Five Main Issues In Payment Process • Limit on time for submission, review, and payment of requisitions • Limit on time for review and approval of change orders that increase the contract price • Effective prohibition of “pay-if-paid” clauses in subcontracts with two limited exceptions • Delayed dispute resolution process for rejection of requisitions and changes • Limit on forced continuation of work more than 30 days beyond due date of undisputed payment

8. Payment Process: c. 149, §29E(c) Every contract must provide reasonable time periods for submission, review and payment of applications for payment • “Reasonable” cannot exceed: • Submission: 30 day limit on billing intervals • Review: Approval or rejection, in whole or in part, within 15 days (7 days added to at each tier below the Owner) • Payment: 45 days from approval

9. Payment Process: c. 149, §29E(c) Approval or Rejection Deadlines • Can be no more than 15 days after submission for action by owner • Deadline for each tier below owner is 7 days longer than for next tier above • Must either approve or reject pay application, in whole or in part • Billing is “deemed” automatically approved if not rejected by deadline • Approval starts time interval for payment

10. Payment Process: c. 149, §29E(c) Rejection of pay applications: • Must be in writing • Must explain “factual and contractual basis for the rejection and must be certified as made in good faith” • No specified grounds for rejection in statute, so long as good faith basis • Contract, not statute, governs grounds for rejection • “Deemed” approval can be reversed by actual rejection per statute any time up to payment deadline

11. Change Orders: c. 149, §29E(d) • Contract must state reasonable time period for approval or rejection of any written request for price increase - cannot exceed 30 days • Time to approve or reject commences later of: • submission of written request or • start of performance of the extra work • Inaction by deadline is “deemed” approval • Rejection can be for any contractually valid reason • Rejection must be in writing, explain the factual and contractual basis for the rejection, and be certified as made in good faith • Additional compensation can be billed in next regular pay application after approval • “Deemed” approval can be undone by rejection of change request before payment deadline

12. Pay-if-Paid: c. 149, §29E(e) • Pay-if-Pay clause unenforceable except in two narrow circumstances, which must be expressly stated in subcontract: • Non-performance by party seeking payment • Person seeking payment must have been given notice and opportunity to cure in accordance with contractual cure provisions, or 14 days if silent • Insolvency of third-party payor if • upper tier payor is or becomes insolvent within 90 days • Notice of Contract filed before submitting first pay application for on-site work • Payor must diligently pursue all other reasonable collection rights and remedies unless fruitless

13. Right to Seek Dispute Resolution • C. 149, §29E (c) and (d) limit contract provisions that require disputes for payment and changes to be reserved until end of project • Maximum mandatory delay or waiting period for commencing dispute resolution process is 60 days after rejection • Restriction applies ONLY to disputes over rejection of pay applications and rejections of additional compensation for changes

14. Right to Suspend Work for Overdue Payment: c. 149, §29E(f) • Limits contract clauses requiring continued performance despite nonpayment of undisputed requisitions • Provides statutory right to suspend work if approvedpayment over 30 days past due, unless non-payment is due to: • Dispute over quality or quantity of the work or • Default by the claimant after approval of the overdue payment • Exception available only where there is prior written notice of the dispute or default and payment of all undisputed amounts

15. Key Issues that Impact the Owner-CM Relationship • The Application for Payment Cycle • Change Order Processing • Contractors Protecting a “Pay-If-Paid” Clause

17. The Payment Cycle • The Subcontractors’ Bargain: Traded certainty of eventually being paid (i.e., no “paid-if-paid”) for extended commercial terms • 22 days to approve at first tier • 45 days for payment after approval • 30 days to stop work for non-payment • Total: 97 days from submission of pay application

18. The Payment Cycle • Impact on Subcontractor-Vendor Relationship • For lower tiered subs and suppliers the periods are longer (7 days each tier) • But, suppliers and manufactures are not likely to be willing to change their commercial terms, e.g. “30 days net” • Will Owners adopt the PPA payment cycle as the new standard of “reasonableness?” • Will Subcontractors get squeezed between traditional vendors terms and the longer PPA payment cycle?

19. Change Order Processing • Subcontractor Goal: To move the paper • Approval or rejection required w/in 30 days • Access to dispute resolution • Billing in advance of formal change • But, many changes can be complex, involve multiple trades, and take months or longer to resolve. • Does the PPA disrupt productive change order management? • Does the PPA merely force project managers at all tiers to “do their job?” • Will large complex changes be broken up into smaller parts to meet PPA obligations?

20. Protecting a Pay-if-Paid Clause • Potential increase in lien filings prior to submittal of initial applications for payment • Increased pressure on upper tier payors to bond off or otherwise discharge lower tier lien filings • Increased use of lien prevention bonds • Payor parties of any tier must balance desire to retain limited “pay-if-paid” benefits against impact on client relations

22. Prompt Pay Best Practices From Designer Focus on pre-construction partnering meetings to set designer/contractor/owner expectations for payment schedule, review and approval. Keep performing the comprehensive review of the “Pencil” monthly requisition with the Contractor prior to submission of formal monthly requisition. Prioritize cost/schedule sensitive change requests as part of the Change Order Review Process.

23. Prompt Pay Best Practices From Owner Reconsider when to start a Change Order? May tend to start them with T&M at first New contract language with GC Pay closer attention to when invoices must be paid and who the ball is with Revise boilerplate contract language to include in RFPs when we go out initially to bid capital projects Consider the advantage/disadvantage of using the same boilerplate for all projects, rather than differentiate at the $3 million threshold Make sure the architect/design team is on board with a detailed process for reviewing and approving change orders and make it mandatory for discussion with the CM/GC at the beginning of every capital project

24. Prompt Pay Best Practices From CM Modify construction contract Train Finance department Train Project managers Know the impact of the Prompt Pay Bill and educate your project personnel-read, attend seminars, bring in legal counsel for training Review and modify contract language (Owner Contracts & Sub Contracts) Prequalify all parties for financial capabilities (Owners, GC’s and Subs) GC’s and Subs – Develop a corporate policy regarding filing Notices of Contract

25. The New Massachusetts Construction Prompt Pay Law