Critics of new legislation aimed at securing prompt payment for subcontractors say the law wildly overshot its mark, and now threatens to further delay the construction process in Massachusetts – or worse, de-rail development financing altogether.
The so-called “prompt pay” bill, sponsored by the Associated Subcontractors of Massachusetts (ASM) and recently signed by Gov. Deval Patrick, makes “void and unenforceable” any contract where payment from a contractor to its subcontractors is dependent on payment from any third party, including the owner. It overturns the “pay when paid” principal that has governed the relationship between contractors since a 1994 overhaul of the state’s mechanics lien laws.
“This is remarkable,” Jack Kessler, a partner in the real estate group at Boston law firm Burns & Levinson, told Banker & Tradesman. “It is a major change from pay when paid, and guys in the middle are caught.”
‘Unintended Consequences’
Prior to the law’s passage, general contractors were obligated to pay subcontractors only when they themselves were paid by a project’s landlord or owner. Now, general contractors must pay subcontractors regardless.
Contractors have always had the right to force payment by enforcement of lien rights or work stoppage. These are generally considered drastic moves, often leading to unfinished and heavily litigated projects. But now, general contractors said they feel there may be no other way to protect themselves against subcontractor claims.
“The (general) contractor is now exposed,” said William Hill, a partner in the Boston office of law firm Mintz Levin, specializing in construction law.
The relationship between owners and contractors will also change fundamentally, sources told Banker & Tradesman. Now obligated to use all legal means to obtain payment, general contractors and subcontractors will most likely file “Notices of Contract” the day a contract is signed, in order to protect their liabilities even before work begins. A Notice of Contract is the first of a three-step process under state law allowing an unpaid party to force payment through a formal lawsuit.
ASM said it sponsored the legislation as a jobs bill, in part to “stop the bleeding” on behalf of subcontractors not getting paid. Board President Sara A. Stafford told Banker & Tradesman the organization worked closely with a number of other groups, including the Associated General Contractors of Massachusetts (AGC).
Bob Petrucelli, president of the AGC, confirmed that his organization had worked on previous versions of the bill with ASM, but said the final iteration was written by ASM alone. Petrucelli called the “jobs bill” description of the legislation “a pretty slick piece of propaganda,” and described the bill as “poorly crafted and riddled with unintended consequences.”
AGC succeeded in making minor modifications to the final bill, including setting a minimum contract price, and did not publicly oppose it. The new law covers contracts with an original price of $3 million or more, and excludes one- to four-unit housing developments.
But when asked how his membership might react to the final bill, Petrucelli said, “I think (general contractors) will feel this interferes with the rights of a private contract.”
Lee Michael Kennedy, president of Quincy-based general contractor Lee Kennedy Co., said the bill “may have been well intentioned, but was not completely thought out.”
“What if a [subcontractor] sends a payment request, we approve it, and the owner doesn’t pay? How are we protected?” Kennedy asked. “[General contractors] will hesitate to accept architects’ change orders because of added liability. Lenders will not be happy.”
“Everyone is going to make payment periods arbitrarily longer,” Kessler said. “The lack of contractual connection between lenders and contractors will be [an] issue.”
Long Term Ramifications
Delaying projects because of payment complications also has permitting ramifications, according to Jamy B. Madeja, an attorney specializing in permitting law with Boston law firm Buchanana & Assoc.
“The bill has implications on how long it will take to get projects done, and so runs [the] risk of expiration of permits,” Madeja argued. “This is not a solution. It’s a bludgeon.”
Tenants will also suffer, if the need to allot extra time for build-outs forces them to sign leases before they can properly assess their needs and the market.
Perhaps most damaging is the potential impact the bill could have on construction financing. Lenders typically only have contractual relationships with a development’s owner. Involving general contractors in an already complex underwriting environment averse to risk may be enough to kill critical financing deals.
The law fully obliges subcontractors to pursue all means of payment, including seeking information on a project’s specific financing, but provides no right for contractors to receive that information – and no obligation on owners, or lenders, to disclose it.
“A lender’s allegiance is to the owner,” said David E. Floreen, executive vice president of the Massachusetts Bankers Association. “Whenever there is a change in the rules of laws governing how payments are made, [lenders] use that as a mandate to go back and look at their underwriting.”
“If a new bill is not hammered out, the banks may not fund projects,” Floreen warned, citing uncertainty over lenders’ and owners’ risk of liens, work stoppages and litigation.
Sources said that while the ASM’s intentions may have been good, laws which force general contractors to pay will have no impact on their actual ability to do so.
As matters stand now, the industries that traditionally collaborate to build in Massachusetts must now stay busy protecting themselves against each other. In a state criticized for its protracted construction and development process, things just got a bit more laborious – and a lot more acrimonious.
