Virginia Invalidates "Pay-If-Paid" Clauses Starting January 1, 2023

Jim Goodrich

Published

During the 2022 legislative session, the Virginia General Assembly passed Senate Bill 550 (“SB 550”), which Virginia Governor Youngkin signed into law. SB 550 amends a portion of the Virginia Prompt Payment Act and a component of the Virginia wage theft statute, prohibiting “pay-if-paid” clauses in both public and private contracts clauses, and will become effective January 1, 2023.

“Pay-if-paid” provisions permit contractors to wait to pay their subcontractors until they receive payment for completed work, thereby shifting the risk of non-payment to the subcontractors.

The key provisions of SB 550 are broken down into two sets of requirements, one for private sector contracts and one for public sector contracts made with state agencies and local governments. Both sets of requirements are designed to address the issues (unique to the type of contract) that arise under “pay-if-paid” provisions. 

Private Sector Contracts

For any construction contract between a private sector owner and its general contractor, SB 550 requires the contract to include a provision requiring the owner to pay the general contractor within 60 days of receiving an invoice for work satisfactorily completed.

For subcontracts between a prime contractor and the subcontractor on a private-sector project, SB 550 requires all contracts to include a provision requiring the contractor to pay a subcontractor by the earlier of (i) 60 days after the satisfactory completion of the portion of the work or (ii) seven days after receipt of amounts invoiced. For private sector contracts, SB 550 contains exceptions to payment requirements for insolvent or bankrupt parties. 

Public Contracts with State Agencies and Local Governments

For any public construction contract, SB 550 requires general contractors and subcontractors to include a payment provision requiring a contractor to pay the entire amount owed to any subcontractor. The requirement overrides both “pay-if-paid” and “pay-when-paid” clauses in a subcontract. Unlike private sector projects, there is no exception for insolvent or bankrupt subcontractors.

SB 550 also requires all project owners and general contractors who intend to withhold payment for a project, regardless of their reason, to state their intention in writing and provide reasonable specificity of the reasons for their nonpayment. Should an owner fail to make timely payments, the party responsible for payment may be liable for interest payments under the Prompt Payment Act. 

Contracts containing “pay-if-paid” or “pay-when-paid” provisions should be reviewed to confirm compliance with the new requirements before the law's January 1, 2023 effective date. The full text of SB 550 can be found by clicking here.

This blog was written with contributions from Summer Associate, Mandee Heinl.

Authors
James E. Goodrich
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