New York State Updates Prompt Payment Act

Construction Industry Advisor

PUBLISHED ON: March 15, 2024

On November 17, 2023, Governor Kathy Hochul signed into law amendments to the Prompt Payment Act (the “Act”) – changing the law in New York regarding retainage payments in construction contracts in two important ways.

ConstructionThe Act applies to all construction contracts equal to or exceeding $150,000.00.  The purpose of the Act is to expedite payment of amounts owed to those who perform contracting services, and the recent amendments are meant to reduce disputes and delays occurring in the release of retainage on private construction jobs that have met "substantial completion" requirements. 

How the Law Changed

First, the Act previously stated that a contractor is entitled to submit a final invoice for payment in full “upon the performance of all the contractor’s obligations under the contract.”  Now, a contractor is entitled to submit a final invoice for payment in full “upon reaching substantial completion, as such term is defined in the contract or as it is contemplated by the terms of the contract.”  N.Y. Gen. Bus. Law §756-a.  Mandating that substantial completion on private construction projects be specified and defined in the contract is meant to reduce disputes and delays between owners and contractors when it comes to time of final payment.

Second, the Act previously permitted an owner to retain “a reasonable amount” of the contract sum as retainage.  This was an ambiguous standard that required owners and contractors to expend additional time and effort negotiating the amount to be withheld.  Now, owners may only retain “no more than five per centum of the contract sum as retainage,” which must be paid upon substantial completion.  N.Y. Gen. Bus. Law §756-c. 

Best Practices for Both Owners and Contractors

As it stands now, there is significant leeway within the Act to allow both owners and contractors to define "substantial completion" in the construction contract.  There is no uniform or mandatory definition of “substantial completion” in the Act.  This will certainly be a point of contention going forward during negotiations of construction contracts to determine when final payment is due.

In a standard AIA contract, “substantial completion” is defined as “the stage in the progress of the Work when the Work or designated portion thereof is sufficiently complete in accordance with the Contract Documents so that the Owner can occupy or utilize the Work for its intended use.”  This standard definition can be used by both owners and contractors to draft and negotiate a revised definition of substantial completion that is project specific and makes the most sense for both parties.

For example, for an owner, the definition of “substantial completion” could be favorably changed to:

Substantial Completion is the stage in the progress of the Work when the Work or designated portion thereof is sufficiently complete in accordance with the Contract Documents so that the Owner can occupy or utilize the Work for its intended use, provided, however, that as a condition precedent to Substantial Completion, the Owner has received (1) all certificates of occupancy for the Project and any other permits, approvals, licenses and other documents from any governmental authority having jurisdiction thereof necessary for the beneficial occupancy of the Project and (2) all warranty, guarantee, and other materials and assignments required by the Contract Documents to be turned over by the Contractor.  Substantial completion shall mean that all contractual obligations are completed and approved by the Owner. All punch list items shall be completed and approved by the Owner as well.

This definition of “substantial completion” seeks to ensure that the project is as close to completion as possible before final payment is due.  Using this definition, owners should establish a thorough punch list (a comprehensive list of items to be completed or corrected prior to final payment) and a clear process for its timely and successful completion within 30 days to ensure project success. Owners should create punch lists as early as possible in the process and ensure they are updated concurrently with all work. This approach guarantees that punch list items are addressed promptly, thus facilitating their completion before final payment is made.

On the other hand, contractors should initially fight to define “substantial completion” per the standard AIA contract definition provided above.  By minimizing the express requirements for final payment in the definition of “substantial completion,” contractors can expedite final payment.  However, if an owner seeks to delay final payment, a contractor could potentially compromise by stating in the definition of “substantial completion” that final payment is due when final plans for the project are sent to the Department of Buildings to obtain a Certificate of Occupancy.  For example, the definition of “substantial completion” could be changed to:

Substantial Completion is the stage in the progress of the Work when the Work or designated portion thereof is sufficiently complete in accordance with the Contract Documents so that the Owner can occupy or utilize the Work for its intended use, provided, however, that payment in full shall be due when the Contractor sends the following items to the Department of Buildings to obtain the Certificate of Occupancy: (1) Final Construction inspection Sign-off, (2) Final Plumbing inspection Sign-off, (3) Final Elevator Sign-off, (4) Final Electrical Inspection Sign-off, (5) Final Building survey, (6) Final Builders Pavement Plan, (7) Owner’s Cost Affidavit, (8) an approved Schedule of Occupancy in DOB NOW: Build.

Owners and contractors will likely need to heavily negotiate the definition of “substantial completion” in the construction contract.  All parties must be aware of how “substantial completion” is defined, and should seek legal advice before signing any agreement.  But keeping these changes to New York’s Prompt Payment Act in mind, owners and contractors can avoid potential disputes and delays when payment is due toward the completion of a construction project. 

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