Public Construction: Interest Rates for Late Payment

By on November 11, 2022

Recently, the Massachusetts Appeals Court confirmed the propriety of a strict interpretation of the Prompt Payment Act, M.G.L. c. 149, § 29E (the “PPA”). The PPA enforces strict timelines for payments on private construction projects with original contract prices of $3,000,000 or more. But what does this mean for public construction projects? In short, nothing. The payment schedules for public works and public building construction continue to be directed by M.G.L. c. 30, §§ 39F, 39G, and 39K. Contractors and subcontractors should refer to these statutes in their entirety prior to embarking on legal action.

Payment of Subcontractors

M.G.L. c. 30, § 39F operates somewhat similarly to a pay-when-paid clause. The statute dictates that subcontractors should be paid for their work once the general contractor has received payment from the awarding authority for said work. The statutory language requires payments to be made “[f]orthwith after the general contractor receives payment… for the labor performed and the materials furnished by that subcontractor.” If the general contractor receives payment from the awarding authority and fails to make timely payments to subcontractors, the awarding authority is tasked with taking “reasonable steps to compel” the general contractor. However, this rarely happens in practice because the most common source for payment delays is the awarding authority itself. In such cases, subcontractors have two paths forward:

(1) wait until the general contractors have restored the project’s cash flow while earning interest on the outstanding balance; and/or

(2) continue performance through to substantial completion and make a demand for direct payment upon the awarding authority.

The latter encourages construction to continue by allowing subcontractors that have reached substantial completion to circumvent the general contractor and make a demand for direct payment from the awarding authority. This is allowed because §39F requires general contractors to pay subcontractors their retainage “[n]ot later than the sixty-fifth day after each subcontractor substantially completes his work in accordance with the plans and specifications.” If a subcontractor has still not received payment “within seventy days after the subcontractor has substantially completed the subcontract work” then the “subcontractor may demand direct payment of that balance from the awarding authority.” This effectively offers subcontractors two sources of recovering payment by placing pressure upon both the general contractor and awarding authority to pay outstanding invoices and retainage. 

Payment of General Contractors

The payment of general contractors is dictated by M.G.L. c. 30, §§ 39G and 39K. Specifically, §39G controls the payment of general contractors working on “public ways, including bridges and other highway structures, sewers and, water mains, airports and other public works,” while §39K controls the payment of general contractors working on “any public building.” The statutory language involving payment is nearly identical in both §39G and §39K as they both require awarding authorities to pay general contractors “[w]ithin fifteen days… after receipt from the contractor… of a periodic estimate requesting payment of the amount due for the preceding month.” Retention is due “within sixty-five days” after substantial completion. If an awarding authority fails to pay its general contractor according to this statutory schedule, the general contractor may pursue interest on all late payments.

Entitlement to Interest for Late Payments

It is in the public’s interest that the government pays general contractors in a timely manner throughout construction because being assured of payment is part of what allows the public to procure construction work at the lowest price. In the event of delayed payment, M.G.L. c. 30, §§ 39G and 39K grant contractors a statutory right to interest on all late payments. Under §39G and §39K, daily interest is applied “at the rate of three percentage points above the rediscount rate then charged by the Federal Reserve Bank of Boston commencing on the first day after said payment is due and continuing until the payment is delivered or mailed to the contractor.” After receiving this payment, the statute obligates general contractors to “pay each subcontractor a portion of any such interest paid in accordance with the amount due each subcontractor.” This automatic award of interest acts to ensure general contractors, and in turn, their subcontractors, are fairly compensated for the delays of the awarding authority. This interest should be automatically added to each and every late payment by the individual tasked with making payments on behalf of the awarding authority.

Failure to Pay Interest on Late Payments

M.G.L. c. 30, §§ 39G and 39K obligate awarding authorities within the Commonwealth to automatically add interest to all late payments on a construction contract. Should the awarding authority fail to do so, the general contractor should remind them of this statutory obligation which, if not followed, constitutes a breach of contract. This reminder serves as a simple yet powerful tool as it puts the awarding authority on notice of its breach of contract. Once a party is informed that it has breached a contract, it must take steps to cure said breach. If the awarding authority fails to make the statutory interest payments, contractors may pursue breach of contract damages under M.G.L. c. 231, § 6C.

M.G.L. c. 231, § 6C entitles parties to interest payments on damages stemming from a breach of contract. This statute can be highly persuasive to awarding authorities because it entitles the prevailing party to an interest rate of “twelve per cent per annum from the date of the breach.” This rate is often significantly higher than that offered by M.G.L. c. 30, §§ 39G and 39K which, as of November 3, 2022, was a mere 4.00%. Courts have found that M.G.L. c. 231, § 6C prevails over M.G.L. c. 30, §§ 39G and 39K. Therefore, should a general contractor pursue litigation, the awarding authority is exposed to a higher statutory interest rate. Consequently, a firm request for interest can be sufficient to encourage awarding authorities to cut a check and to get payments moving again on a project.

Kaitlin Morel