Chapter 28 contemplates three parties – the owner, the contractor, and the subcontractor. An “owner” is a person or entity, other than a government entity, who directed the improvements to the real property be made for their benefit and with an interest in the real property. Interest in the real property is not limited to ownership, meaning a leasehold interest is sufficient. A “contractor” is any person that contracts directly with the owner for construction services. A “subcontractor” is any other person who contracts to provide construction services or materials for a project but has a contract with the contractor or another subcontractor. Essentially, a subcontractor is any subcontractor or supplier at any tier.
Under Chapter 28, the contractor is entitled to payment from the owner by the 35th day after the contractor submitted a written request for payment to the owner for an amount to which the contractor is entitled by the contract. Subcontractors are due payment for the construction services or materials they have provided on the seventh day after the entity it contracted with receives payment for their labor, services, or materials.
For example, assume the contractor subcontracted the concrete scope of work to a subcontractor, who purchased the concrete from a supplier. The supplier delivered the concrete, the subcontractor placed the concrete, and the contractor submitted a payment request to the owner that included the concrete scope of work. Unless disputes over the concrete exist, the owner must pay the contractor by the 35th day after the written payment request was received. Once the contractor receives payment from the owner, the contractor has seven days to pay the concrete subcontractor, and the concrete subcontractor then has seven days after receiving payment from the contractor to pay its concrete supplier.
This assumes no dispute exists. In the event of a “good faith” dispute as to any amount owed, Chapter 28 allows an owner, contractor, or subcontractor to withhold payment to the extent of that dispute. This provision is the only part of the statute that treats residential and non-residential projects differently.
On a residential construction project (single-family home, duplex, triplex, or quadplex), the party disputing payment may withhold up to 110 percent of the disputed funds. Taking our scenario above in a residential project context, if the concrete subcontractor claims it is owed $5,000 and the contractor has a good faith dispute (e.g., one section of concrete needs to be redone) at an estimated cost of $1,000, the contractor can withhold $1,100 without violating Chapter 28 until the dispute is settled. For a non-residential project the Code limits withholding to 100 percent of the disputed amount.
If an undisputed amount due under Chapter 28 is not paid, the person who is entitled to payment may also collect 1.5 percent interest each month on the unpaid amount. The interest begins to accrue on the first day after payment was due and stops on the date (1) payment is delivered, (2) payment is mailed, or (3) a judgment is entered by a court in a lawsuit where a claim under Chapter 28 is made. In a situation where a contractor or subcontractor is entitled to payment of a large amount and/or the length of time of wrongful withholding is months or even years, these interest amounts can add up significantly.
The statute also offers a potentially more potent remedy. If a contractor or subcontractor is not receiving the full amount due, Chapter 28 allows a contractor or subcontractor to suspend their work without violating any contrary contractual provisions. The contractor or subcontractor must provide 10 days’ written notice to the owner or the owner’s lender of the non-payment issue. Then work can be suspended, and that suspension can continue until the contractor or subcontractor is paid the amount wrongfully withheld, interest, and the reasonable costs of any demobilization or remobilization associated with the suspension.
The contractor or subcontractor who suspends work will not be liable for any damages associated with the suspension unless they are notified prior to the suspension taking effect that payment is being withheld because of a good faith dispute. As noted above, the good faith dispute exception shields the party withholding payment from liability when a good faith dispute actually exists.
Chapter 28 cannot be waived. In other words, any provision in a contract or subcontract that tries to get around Chapter 28 by waiving its requirements is void and unenforceable.
Public projects have their own prompt payment statute. Chapter 2251 of the Texas Government Code has slightly different provisions, including a much smaller rate of interest, but essentially operates in the same manner as Chapter 28 to allow for contractors and subcontractors to collect interest on wrongfully withheld payments. Due to space limitations, we will cover the Governmental Prompt Payment Act in a future column.
No one wants to leave money on the table. Remember that you could be entitled to interest on wrongfully withheld payments pursuant to Chapter 28 of the Texas Property Code.
JD Holzheauser is a Senior Counsel at Peckar & Abramson, P.C. He can be reached at email@example.com and 512.236.0009