SCDOT’s New Prompt Payment Requirements Begin July 1
As of July 1, 2017, the South Carolina Department of Transportation (“SCDOT”) will impose new prompt payment requirements on its contractors.
The New Requirements
The new Prompt Payment Clause, which can be found in its entirety here, will require the following:
- The Contractor will pay its subcontractors within 7 calendar days of receiving payment from SCDOT.
- Contractor may withhold 5% retainage on progress payments, but must release all retainage within 7 calendar days from the latter of: (1) payment by SCDOT of the last work item of the subcontract; or (2) SCDOT’s acceptance of the last work item of subcontract. Contractor may continue to withhold retainage upon providing the Director of Construction documentation for good cause to withhold retainage. The Director of Construction must approve the continued withholding.
- Prior to receiving each monthly estimate payment, Contractor must certify to SCDOT that the estimate is complete and that its subcontractors have been paid for work covered by previous estimates.
- Contractor must submit verification that it has received similar certifications or evidence from its subcontractors that all lower-tier subcontractors have been paid in accordance with the provisions of the Prompt Payment Clause. No payment will be made to Contractor unless such documentation/certification is received or SCDOT has issued written approval for delayed payment.
- By submitting a bid or proposal to SCDOT, Contractor agrees to include the Prompt Payment Clause in all subcontracts, without modification.
- Contractor is responsible for requiring all of its subcontractors to include the Prompt Payment Clause in all lower-tier subcontracts.
- Contractors are in violation of the Clause by knowingly entering into a subcontract or knowingly allowing a subcontractor or lower-tier subcontractor to enter into a subcontract that does not include the Clause.
- Failure to comply with the Clause shall constitute a material breach of the contract and shall result in one or more of the following sanctions: (1) no further payments to the Contractor unless and until compliance is achieved; (2) monetary sanctions; and/or (3) the Contractor being declared in default and being subject to termination pursuant to Section 108.10 of the SCDOT Standard Specifications.
“Safe Harbor” provisions for Contractors
The New Prompt Payment Clause does include “Safe Harbor” provisions for Contractors that excuse prompt payment or the release of retainage under certain conditions if there is a legitimate subcontract dispute. No payment may be withheld from a subcontractor without prior written approval from SCDOT. Contractors seeking to delay payment to a subcontractor should submit a written request to delay payment explaining the nature of the dispute and identifying relevant subcontract provisions as support.
Contractors may also use the additional grounds found in the South Carolina Prompt Pay Act (S.C. Code Section 29-6-40) as a basis to withhold payment. Those grounds include unsatisfactory job progress, defective construction not remedied, disputed work, third party claims filed or reasonable evidence that claim will be filed, failure of contractor or subcontractor to make timely payments for labor, equipment, and materials, damage to owner, contractor, or another subcontractor, or reasonable evidence that the contract or subcontract cannot be completed for the unpaid balance of the contract or subcontract sum, or a reasonable amount for retainage.
As long as it withholds payment, Contractor must submit a monthly status report of any subcontractor payments withheld with its monthly progress estimate application. The Contractor must either justify the continuing payment hold or certify that the matter is resolved and payment has been issued.
Contractors should act now to institute procedures to attach the Prompt Payment Clause as an Addendum or Amendment to all subcontracts on SCDOT Projects. The Addendum or Amendment should also include a provision requiring all subcontractors to include Clause in all of its subcontracts, purchase orders and work orders.