The Virginia General Assembly has joined a minority of jurisdictions that ban pay-if-paid clauses in construction contracts on public and private projects. Senate Bill 550 went into effect applying to contracts executed after January 1, 2023, and most recently has been amended effective July 1, 2023. This update highlights the recent amendments to Virginia’s prohibition against pay-if-paid provisions, of which owners and contractors should be aware to ensure that their contracts comply with developing law in the Commonwealth.
Recap on Senate Bill 550
On April 27, 2022, the Virginia General Assembly passed Senate Bill 550, which amended Virginia Code §§ 2.2-4354 and 11-4.6, which govern both public and private sector contracts. In short, SB 550 (as the bill is commonly known) prohibited pay-if-paid clauses, and established fixed deadlines for the payment of invoices on private projects. Previously, Virginia’s Prompt Payment Act only applied to public projects.
More specifically, SB 550 requires owners on private projects to pay their contractors within sixty (60) days of receiving an invoice, and contractors and subcontractors on private projects must pay their subcontractors by the earlier of sixty (60) days after receiving an invoice or seven (7) days after receiving payment from the owner or higher-tier contractor for the subcontractor’s work. Of course, owners, contractors, and subcontractors are still entitled to withhold payment for nonconforming work, but SB 550 requires written notice articulating the reasons for the withholding. Also, on private projects, an exception to payment exists when the owner is insolvent, or the owner is a debtor in bankruptcy. SB 550 also establishes certain interest penalties for non-payment, which may not be extinguished by contract.
At the end of 2022, the Department of General Services’ Public Body Procurement Workgroup issued a report outlining several amendments needed to address certain ambiguities and inconsistencies in the text of SB 550, such as:
- Uniform definitions of “construction/construction contract,” contractor/general contractor,” and “subcontractor;”
- Clarifying whether contracts for professional services, including architectural and engineering services, fall within the scope of SB 550;
- Uniform language for the provisions permitting owners and high-tier contractors to withhold payments from lower-tier contractors due to nonconforming work;
- Clarifying that the provision making contractors on public projects liable for the “entire amount owed” to their subcontractors is not intended to affect the contractor’s right to withhold retainage; and
- Addressing the inconsistency between the provision requiring owners on private projects to pay general contractors within 60 days of “receipt of an invoice” with the provision requiring contractors on such projects to pay their subcontractors within the earlier of (i) 60 days after “satisfactory completion” of the work for which payment is sought or (ii) 7 days after receipt of payment from the owner.
On March 26, 2023, Governor Glenn Youngkin approved HB 2500 (companion bill to SB 1313), which amended and reenacted Virginia Code §§ 2.2-4377 (Virginia Public Procurement Act (“VPPA”) prompt payment definitions), 2.2-4354 (VPPA required payment clauses) and 11-4.6 (required payment clauses in construction contracts and wage theft law). The changes, certain of which are summarized below, became effective July 1, 2023.
Notable Amendments to § 2.2-4347 – Virginia Public Procurement Act
- New definition of “construction contract:”
“Construction contract” means a contract relating to the construction, alteration, repair, or maintenance of a building, structure, or appurtenance to such building or structure, including moving, demolition, and excavation connected with such building or structure, or any provision contained in any contract relating to the construction of projects other than buildings.
- Addition of “general contractor” to the definition of “contractor:”
“Contractor” or “general contractor” means the entity that has a direct contract with any “state agency” as defined herein or any agency of local government as discussed in § 2.2-4352.
Notable Amendments to § 2.2-4354 – Virginia Public Procurement Act
- Several modifications to achieve consistency between Virginia Code §§ 2.2-4354 and 11-4.6.
- Specificity concerning the timing and nature of a contractor’s required notice of withholding to a subcontractor, namely, written notice provided “within 50 days of the receipt of such invoice … specifically identifying the contractual noncompliance, the dollar amount being withheld, and the lower-tier subcontractor responsible for the contractual noncompliance.”
- Express language clarifying that the prompt payment terms will not “(i) apply to or prohibit the inclusion of any retainage provisions in a construction contract or (ii) apply to contracts awarded solely for professional services as that terms is defined in § 2.2-4301 where the public body is contracting directly with an architectural and engineering firm.”
Notable Amendments to § 11-4.6 – Required Construction Contract Provisions
- Same definition of “construction contract” as in Virginia Code § 2.2-4347, “except for contracts awarded solely for professional services as that term is defined in § 2.2-4301.”
- Definitions of “contractor” or “general contractor” now “mean the same as that terms is defined in § 54.1-1100,” which is part of the Virginia statute governing licensing of contractors.
- New definition of “subcontractor” which “means the same as that term is defined in § 2.2-4347.”
- Clarity added that an owner withholding payment for noncompliance must notify the general contractor “within 45 days of the receipt of such invoice … specifically identifying the contractual noncompliance and the dollar amount being withheld.”
- Additional language to make clear that the 60-day period for the contractor to make payment to a subcontractor runs from “receipt of an invoice following” satisfactory completion of the invoiced-for work.
- Terminology change to state that a contractor will not be liable for amounts withheld “due to the subcontractor’s noncompliance with the terms of the contract”, instead of “breach of contract.”
- Clarity added that a contractor withholding payment must provide notice “within 50 days of the receipt of such invoice.”
- New language requiring that “[e]very subcontract between a subcontractor and a lower-tier subcontractor or supplier, of any tier, shall contain the identical payment, notice, and interest requirements as those provided in this subdivision if (i) such construction contract is related to a project other than a single-family residential project and (ii) the value of the project, or an aggregate of projects under such construction contract, is greater than $500,000.”
The above is not intended to be an exhaustive list of the changes made to the Virginia Code by HB 2500. It is imperative that all project owners, contractors and subcontractors performing construction contracts in Virginia familiarize themselves with the many recent changes to the above-referenced statutory provisions and ensure that their contract documents and internal procedures are compliant therewith. While the General Assembly has addressed several concerns raised by stakeholders regarding the language of SB 550, issues remain, particularly a lack of clarity concerning the notice requirements attendant to continued withholdings, and handling of legitimate change order disputes, among others. It is imperative for impacted parties to continue to monitor developments concerning this area of Virginia law and to seek legal advice if needed.
Watt Tieder is one of the largest construction boutique law firms in the United States, with a diverse and experienced team of attorneys representing many of the world’s leading corporations, developers and contractors on both domestic and international projects. We represent more than half of the Top 30 Engineering News Record contractors and most of the nation’s top sureties. With offices in six cities in the United States, the firm is a dynamic, mid-size boutique that provides knowledgeable and practical legal representation to the construction, surety, government contracts and bankruptcy industries world-wide.
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