The prompt payment act is a federal and state law that requires timely payment on construction projects. For general contractors, understanding the prompt payment act means knowing exactly when you must pay subcontractors after receiving funds from the project owner. In 2025, construction payment disputes totaled $17.3 billion nationally, and over half involved violations of prompt payment timelines.

This guide explains the prompt payment act in plain terms. No legal jargon. Just the rules, deadlines, and penalties every GC must know.

How the Prompt Payment Act Works in Practice

The prompt payment act creates a payment waterfall. Money flows from the owner to the GC to the subcontractor within fixed time windows. Breaking any link in that chain triggers penalties.

Here is how a typical payment cycle works on a federal project:

The subcontractor submits an invoice to the GC. The GC includes that amount in the next pay application to the owner. The government reviews and pays the GC within 14 days of receiving a proper invoice. The GC then has 14 days to pay the subcontractor.

On state and private projects, the timelines change but the structure stays the same. The owner pays the GC. The GC pays the sub. Each step has a deadline.

Federal vs. State Prompt Payment Act Rules

The federal prompt payment act and state laws serve the same purpose but differ in key details.

Requirement	Federal	California	Texas	Florida	New York
GC payment deadline	14 days after receipt	7 days after receipt	7 days after receipt	10 days after receipt	7 days after receipt
Interest rate	Treasury rate (5.25%)	2% per month	1.5% per month	1% per month	1% per month
Attorney's fees recoverable	Yes	Yes	Yes	Yes	Yes
Retainage cap	10%	5% (public) / 10% (private)	10%	10% (public) / 10% (private)	5% (public)
Work suspension allowed	No specific provision	Yes (after notice)	Yes (after notice)	Yes (after 10-day notice)	No specific provision
Applies to private work	No (federal only)	Yes	Yes	Yes	Public only (by statute)

The differences matter. A GC working in California has 7 days to pay subs after receiving owner payment. The same GC on a federal project in California has 14 days. Missing either deadline triggers separate penalty calculations.

What Counts as a "Proper Invoice"

The prompt payment clock does not start until the GC receives a "proper invoice" from the subcontractor. A proper invoice must include specific elements.

Required elements for federal projects:

Contractor name and address
Invoice date and number
Contract number and task order number
Description of work completed
Quantity and unit price for each line item
Payment terms
Name and title of the person authorizing the invoice

Common state requirements:

License number of the subcontractor
Project name and address
Period covered by the invoice
Schedule of values breakdown
Lien waiver for previous payment (if required)

If a sub submits an incomplete invoice, the GC must notify them in writing within 7 days on federal projects (10-15 days in most states). The payment clock pauses until the sub resubmits a corrected invoice.

GCs who delay invoice rejection beyond the notice period lose the right to claim the invoice was improper. The payment clock runs from the original submission date.

How to Calculate Prompt Payment Act Interest Penalties

Interest calculations follow a straightforward formula, but errors are common.

Formula: Outstanding balance x daily interest rate x number of late days = interest owed.

Example: A GC owes a subcontractor $150,000. The state rate is 2% per month (0.0667% per day). Payment is 45 days late.

$150,000 x 0.000667 x 45 = $4,501.50 in interest penalties.

Add attorney's fees in states that allow recovery, and that $150,000 late payment now costs $160,000 or more.

Interest accrues automatically. The sub does not need to demand it. The sub does not need to file a claim first. The GC owes the interest the moment the deadline passes.

The Retainage Problem Under Prompt Payment Acts

Retainage creates the most disputes under prompt payment laws. GCs routinely hold retainage beyond the statutory release deadline.

Most states require releasing retainage within 30 to 60 days after the sub completes their scope of work. The key phrase is "their scope." A plumber who finishes roughing and trim in month 6 of a 12-month project should receive their retainage 30-60 days after their final inspection, not 30-60 days after the building receives a certificate of occupancy.

GCs who hold retainage across all subs until project completion face penalty exposure on every sub who finished early. On a project with 25 subcontractors, that adds up fast.

Read the full Prompt Payment Act Guide for retainage limits by state.

What GCs Can Legally Withhold Without Penalty

The prompt payment act allows GCs to withhold payment in specific situations without triggering penalties.

Disputed work. If the sub's work does not meet specifications, the GC can withhold the disputed portion. The GC must pay the undisputed portion on time and provide written notice of the dispute.

Incomplete documentation. Missing lien waivers, unsigned change orders, or incomplete certified payroll reports can justify withholding. The GC must notify the sub of the deficiency promptly.

Back-charges. Legitimate back-charges for damage caused by the sub can be deducted from payment. The GC must document the damage, provide written notice, and give the sub an opportunity to correct the issue before deducting.

Safety violations. Some contracts allow withholding for unresolved safety violations. The withholding must be proportional to the cost of correcting the violation.

In every case, the GC must pay the undisputed balance by the deadline. Withholding the full payment over a partial dispute is the single most common prompt payment violation.

How Prompt Payment Compliance Protects the GC

Following prompt payment rules does more than avoid penalties. It strengthens the GC's position in three ways.

First, timely payment builds subcontractor loyalty. Subs prioritize GCs who pay on time. On a competitive bid project, subs give better pricing to GCs with a reputation for prompt payment.

Second, prompt payment compliance reduces lien claims. A sub who receives timely payment has no reason to file a mechanic's lien. Liens cloud title, delay project financing, and create owner disputes.

Third, a clean payment record supports bonding capacity. Surety companies review payment history when underwriting bonds. A GC with prompt payment violations may face higher premiums or reduced bonding limits.

FAQs

Does the prompt payment act apply to residential construction? In most states, yes. Prompt payment statutes cover both commercial and residential construction projects. A few states have separate provisions for residential work with different timelines. Check your state statute. If you hire subcontractors on residential projects, you likely fall under the prompt payment law.

Can a GC charge interest to the owner for late payment? Yes, in most states. The same prompt payment statutes that require GCs to pay subs on time also require owners to pay GCs on time. If the owner pays late, the GC can recover interest at the statutory rate. Some contracts attempt to waive this right, but in states where prompt payment rights are non-waivable, those provisions are unenforceable.

What should a GC do when a sub submits an inflated invoice? Review the invoice against the schedule of values and actual completed work. If specific line items are overstated, notify the sub in writing within the state's notice period (typically 7-15 days). Pay the amount you agree is correct by the deadline. Withhold only the disputed portion and document your reasons.

Are there criminal penalties for prompt payment violations? Criminal penalties are rare but exist in a few states. Most states treat prompt payment violations as civil matters with interest penalties and attorney's fees. However, repeated and willful nonpayment can constitute fraud or theft of services in some jurisdictions, which carry criminal liability.

How does the prompt payment act affect joint check agreements? Joint check agreements do not override prompt payment deadlines. If the GC issues a joint check to the sub and a supplier, the payment must still be issued within the statutory deadline. The joint check simply adds a payee. It does not extend the payment timeline.

What records should GCs keep for prompt payment compliance? Keep owner payment receipts with dates, subcontractor invoices with received dates, payment processing records with issue dates, dispute notices, lien waivers, and all correspondence about payment timing. Store these records for at least the statute of limitations period in your state, typically 4-6 years.

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