Condo talk: The Contractor Prompt Payment Act

Associations enter into countless contracts, often involving very significant amounts of money. Unfortunately, many boards do so without giving much thought to any provision of the contract other than how much are the goods or services going to cost.

There are many issues a board should make sure are addressed in the written contract (and I will address those in a future column). I want to focus here on a potentially huge trap for the unwary association board.

The Prompt Payment Act, affecting associations of more than 12 units, describes and mandates very specific time frames and procedures for making payment to a construction contractor and, importantly, for disputing an invoice. The act covers contracts for design, construction, alteration, improvement or repair, and that describes the bulk of contracts entered into by associations.

So let’s take a closer look at the specifics of the Prompt Payment Act. In a nutshell, this law requires an association to pay the amount that a construction contractor requests in an invoice (known as an application for payment), no more than 15 days after the association approves the contractor’s application for payment. Importantly, and take note, the contractor’s payment application is deemed automatically approved 25 days after the association receives it, unless the association provides the contractor with a written statement of the amount being withheld from the contractor and the reason for withholding payment.

That written statement from the association to dispute an invoice has to be provided to the contractor before the end of the 25 days. If the association does not provide written notice of a dispute and the reason for withholding payment within that time, the payment application is deemed approved and the association will lose its rights to dispute the invoice!

That’s the potential trap if a board is not paying attention to the window of time that it has to dispute a construction contractor’s invoice under the Prompt Payment Act.

The act further provides that if the association finds a portion of the work is not in accordance with the contract, the association may withhold payment for the reasonable value of that portion of the work only. Payment must still be made for any portion of the contract for which the work has been performed in accordance with the provisions of the contract.

An association will be exposed to penalties if a payment that is due is not made in a timely manner, in addition to losing the right to assert defenses to nonpayment. That is, the association will be liable for the amount of that payment, plus interest at the rate equal to 10 percent per year. The contractor or subcontractor who is not paid as required by this law may also, after providing seven calendar days written notice to the association, suspend performance of the contract until the payment required pursuant to this law is made.

The typical pre-printed contractor’s construction contract calls for payment within 30 days of submittal of an invoice. If the association “blindly” accepts this language, the association’s rights to dispute an invoice under the Prompt Payment Act may be prejudiced. To protect an association from the trap of unintended financial consequences, construction contracts must be carefully drafted to either waive the Prompt Payment Act, or to set forth procedures and time frames for payment and disputing invoices as described in this law.

Whether the provisions of the Prompt Payment Act can be waived by the parties remains to be determined by the courts. Nonetheless, associations should raise the issue during contract negotiations and seek to include appropriate waiver language in the contract. While many contractors will not agree to such a waiver, it doesn’t hurt to put that on the table — “nothing ventured, nothing gained!”

The bottom line here is that associations of more than 12 units must have an attorney review construction contracts to make sure the payment and dispute procedures set forth under the Prompt Payment Act are either waived by the parties or are clearly described. However, just setting out the proper payment and dispute procedure in the contract is not enough to protect the association. They must be followed!

Ÿ David M. Bendoff is an attorney with Kovitz Shifrin Nesbit in Buffalo Grove. Send questions for the column to him at CondoTalk@ksnlaw.com. The firm provides legal service to condominium, townhouse, homeowner associations and housing cooperatives. This column is not a substitute for consultation with legal counsel.