In California, under Business and Professions Code Section 7108.5 and California Civil Code Section 3260.1, Owners and Contractors are to pay their contractors and subcontractors within 10 days of receiving progress payments or retention payments unless otherwise agreed in writing. The penalty for violating the prompt pay statutes is disciplinary action by the Contractors State License Board. However, and most importantly, it subjects the Owner or Contractor to a penalty of 2% per month on the principal balance owing, plus attorney fees and costs incurred in any legal action filed to collect the money. Sometimes payment is withheld for work where there is a good faith bona fide dispute over the amount due. In this case, the Owner or Contractor may only withhold 150% of the amount in controversy - not the entire amount.
Consider the practical application
A typical situation works like this. You are a Subcontractor and are owed a $ 100,000 progress payment by the General. When he receives the money on his draw request, he must pay you within 10 days after receiving those funds from the Owner. If he doesn't, the clock starts ticking and interest on the amount you are owed starts accruing at 2%, or $ 2,000 per month. The longer he delays payment, the more interest accrues. So, if you spend 4 or 6 or 8 months chasing your money, the interest on what he owes you is $8,000, $ 12,000, or $16,000, depending on how much time has passed. If he still refuses to pay and you are forced to hire a lawyer and sue, even more time will pass. He will owe you not only the interest penalty, but your attorney fees and related expenses as well. It would not be unusual for it to take 18 or more months from the time you did the work to the time you get to a trial. The General's penalty could be more than $36,000 if you prevail at trial or arbitration!
Know Your Rights Under the Statutes
If there is no genuine dispute about the amount owing, immediately demand your money, in writing. Let them know you are aware of your rights, and that you will seek a lawyer's help to collect every penny of penalty money and attorney fees if they refuse to pay.
If there is a genuine dispute about the amount owing, figure out how much is in dispute. Subtract 150% of that amount from your total amount due, and demand the balance be paid immediately.
Consult a Construction Lawyer and File a Lawsuit
If your client still refuses to pay, hire a lawyer who specializes in construction matters.
With the kind of money at stake in construction claims, few can afford to walk away or "write off" debts from deadbeat clients who don't pay their bills. When you file a lawsuit, make sure the attorney includes claims for the 2% per month penalty on the principal balance and reimbursement of attorney fees and related costs.
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