Prompt payment statutes have long served as the backbone of financial fairness and predictability in the construction industry. Designed to ensure that those who perform work and furnish materials are paid timely, these statutes help maintain cash flow stability across all tiers of a project. In recent years, state legislatures across the country have taken steps to address the long-standing tension between project progress and payment timing in the construction industry.
A clear trend has emerged — states are increasingly amending their prompt payment laws with a focus on clarifying payment obligations and reinforcing enforcement mechanisms. This trend suggests a legislative desire to reign in an owner’s ability to withhold payment. This legislative shift reflects a broader policy objective: ensuring that parties who perform work or furnish materials are compensated in a timely manner, thereby promoting liquidity and stability throughout the contracting chain.
These key developments in several jurisdictions illustrate this evolving legal landscape:
1. New York’s 5% Retainage Cap and “Substantial Completion” Trigger
Effective for contracts over $150,000 entered into on or after November 17, 2023, New York enacted significant amendments to its prompt payment statute, codified in N.Y. Gen. Bus. Law §§ 756–758. The most notable change is the imposition of a hard cap on retainage — owners may now withhold no more than 5% of the contract sum. This is a major departure from the previous standard, which allowed retention of a “reasonable amount,” an ambiguous term that was frequently litigated at great cost to project participants.
Just as important, the amendments allow contractors to submit a final invoice and seek full payment, including the release of retainage, upon achieving “substantial completion.” Previously, contractors could only trigger final payment “upon the performance of all the contractor’s obligations under the contract”—an arguably ambiguous milestone. The shift to substantial completion brings greater clarity and earlier access to withheld funds, helping contractors maintain project liquidity and reduce financing burdens.
These changes represent a legislative recalibration of power between owners and contractors. By replacing discretionary language with defined contractual events, New York has strengthened the enforceability of prompt payment obligations, potentially reducing an owner’s ability to withhold payment.
2. Virginia: Expanding Coverage and Notice Requirements
Virginia also enacted reforms in 2023, enhancing protections on both public and private construction projects. First, the commonwealth of Virginia broadened the definition of “Construction Contract,” which now includes subcontractors, thus imposing the prompt payment rules on those agreements as well. The definition of “subcontractor” was also expanded to include suppliers and other downstream sub-subcontractors.
For private projects, owners and contractors are now required to follow a specific procedure when withholding payment due to alleged “noncompliance.” Owners must issue written notice within 45 days, and the notice must “specifically identify the contractual noncompliance and the dollar amount being withheld.” Contractors must now pay lower-tier subcontractors within 60 days, and if the contractor intends to withhold payment, it must provide the same detailed notice within 50 days from receipt of a pay application.
On public projects, Virginia imposed an even stricter regime: Regardless of whether the contractor has received payment from the government agency, it must pay subcontractors within 60 days of invoice receipt. This rule could be construed as effectively prohibiting “pay-if-paid” clauses in public contracts, ensuring that cash flow reaches lower-tier parties even when upstream payment is delayed.
These amendments aim to reduce disputes over vague compliance claims and create transparent, enforceable deadlines for payment and notice. Contractors must now ensure their internal compliance teams are monitoring these deadlines to avoid inadvertent statutory violations.
3. Texas: Change Order Thresholds and Nonwaivable Protections
Texas joined the ranks of states implementing bright-line rules with the addition of several new provisions to its prompt payment act. Effective for contracts executed on or after September 1, 2023, contractors and subcontractors now have the statutory right to refuse to perform additional work if the value of that work — combined with other prior additional work not yet covered by a fully executed change order — exceeds 10% of the original contract value.
Crucially, the statute provides that the contractor or subcontractor is not liable for damages stemming from the refusal to proceed with such additional work. The law explicitly bars contractual waiver of this right, declaring any such provision void as against public policy.
This change addresses a longstanding imbalance in construction contracting: the tendency of owners to issue large volumes of change directives without corresponding change orders. By tying contractor obligations to defined thresholds and codifying a no-fault refusal right, Texas has empowered contractors to better control project scope and cost exposure.
4. Washington, D.C.: Antisetoff Protections and Interest Penalties
In 2023, Washington, D.C. amended its Private Contractor and Subcontractor Prompt Payment Act to address the use of cross-project setoffs to deny payment to contractors and subcontractors. The amendment prohibits any contract or subcontract provision executed after March 31, 2023 that allows one party to withhold funds on one contract to satisfy claims or damages arising under another.
This statutory change is particularly impactful for subcontractors, who often find themselves ensnared in disputes wholly unrelated to the project for which payment is owed. The amendment complements existing statutory provisions that require payment of undisputed amounts within seven days of receipt, and also impose a steep 1.5% monthly interest penalty for late payments. Successful claimants are also entitled to recover attorneys’ fees.
By prohibiting cross-contract setoffs and strengthening financial penalties, D.C. has clarified that owners and contractors must treat each project independently for payment purposes — further enhancing prompt payment compliance in the private sector.
5. Tennessee: Judicial Relief and Right to Stop Work
Tennessee amended its prompt payment law in 2020 to address contractor concerns about payment enforcement. Under the revised statute, a party who has not received timely payment may send a written notice to the nonpaying party. If no adequate legal justification is received within 10 days, the unpaid party is entitled to seek injunctive relief, and most importantly, it may stop work so long as notice and an opportunity to cure is provided. The statute also entitles the unpaid party to an extension of the contract schedule, protecting contractors from delay claims arising from their lawful decision to suspend performance.
The revisions to the Tennessee law also now require that retention be placed in an interest-bearing escrow account, with funds to be released within 90 days of substantial completion. Failure to place funds into the required escrow account could result in a $300 per day “damage,” and penalties for failing to release retainage on time could reach up to $3,000 per day.
These amendments bring much needed clarity to Tennessee’s prompt payment act. Not only do they indicate a strong policy in favor of timely payment to contractors, but they also provide contractors with substantial tools to ensure compliance.
6. Pennsylvania’s CASPA: Nonwaivable Rights and Work Suspension
The commonwealth of Pennsylvania took a major step toward contractor protections with its 2018 amendments to the Contractor and Subcontractor Payment Act (CASPA), 73 P.S. § 501, et seq. While not as recent as the 2023 reforms in other states, these changes remain highly influential.
Among the most significant revisions: (1) contractors and subcontractors are expressly authorized to suspend performance for nonpayment, provided they deliver required notice and observe the required waiting period, and (2) contractors can obtain release of retainage prior to final completion if they post a 120% maintenance bond. Neither of these terms are subject to alteration by the parties.
Prior to the amendments, CASPA’s applicability and enforceability were frequently disputed in litigation. By making the statutory rights mandatory and explicitly authorizing work suspension, Pennsylvania effectively armed contractors with leverage in the event of delayed or unjustified nonpayment. These provisions have become a valuable tool in managing project disputes while preserving the right to payment.
Conclusion: Toward Clarity, Balance, and Enforcement
The recent wave of prompt payment amendments reflects a national shift away from discretionary standards and toward statutory specificity. Whether by capping retainage, strengthening enforcement mechanisms, or setting mandatory notice and payment procedures, legislatures are responding to well-documented payment challenges across the construction industry.
For owners, contractors, subcontractors and legal professionals, these changes underscore the need to closely monitor statutory developments in every jurisdiction where work is performed. Compliance is not only a matter of avoiding penalties — it is also a vital strategy for managing risk, protecting cash flow and fostering sustainable project delivery.
Key Takeaways for Construction Professionals
- Review and update your standard contract templates to align with new statutory caps, notice requirements and payment triggers.
- Implement internal protocols to ensure timely invoicing, documentation and responses to payment notices.
- Consider legal review of multiproject relationships to avoid inadvertent violations of antisetoff rules.
- Train project managers and finance staff on statutory deadlines to avoid interest and penalty exposure.
