Delaware Prompt Payment Guide & FAQs

(a) Any lender may charge and collect from a borrower interest at any rate agreed upon in writing not in excess of 5% over the Federal Reserve discount rate including any surcharge thereon. Where there is no expressed contract rate, the legal rate of interest shall be 5% over the Federal Reserve discount rate including any surcharge as of the time from which interest is due; provided, that where the time from which interest is due predates April 18, 1980, the legal rate shall remain as it was at such time. Except as otherwise provided in this Code, any judgment entered on agreements governed by this subsection, whether the contract rate is expressed or not, shall, from the date of the judgment, bear post-judgment interest of 5% over the Federal Reserve discount rate including any surcharge thereon or the contract rate, whichever is less.

(b) If the rate of interest specifically set forth in any bond, note or other evidence of indebtedness, exclusive of other charges, fees or discounts authorized or permitted under federal law or under any rule or regulation promulgated pursuant thereto, does not exceed the lawful rate prescribed in subsection (a) of this section, no person shall, by way of defense or otherwise, avail himself or herself of any of the provisions of this chapter, to avoid or defeat the payment of any interest or any such charges, fees or discounts, which any such person shall have contracted to pay in respect of any loan insured by the Federal Housing Administration, or the Commissioner thereof, under or pursuant to the provisions of the National Housing Act [12 U.S.C. § 1701 et seq.], approved June 27, 1934, and amendments thereto, or guaranteed by the Veterans Administration, or the administrator thereof, under and pursuant to Title 38 of the United States Code [38 U.S.C. § 3701 et seq.], and amendments thereto; nor shall anything contained in this chapter be construed to prevent recovery of any such interest or any such charges, fees or discounts from any person who shall have contracted to pay the same.

(c) Notwithstanding any other provision in this chapter to the contrary, there shall be no limitation on the rate of interest which may be legally charged for the loan or use of money, where the amount of money loaned or used exceeds $100,000, and where repayment thereof is not secured by a mortgage against the principal residence of any borrower.

(d) In any tort action for compensatory damages in the Superior Court or the Court of Common Pleas seeking monetary relief for bodily injuries, death or property damage, interest shall be added to any final judgment entered for damages awarded, calculated at the rate established in subsection (a) of this section, commencing from the date of injury, provided that prior to trial the plaintiff had extended to defendant a written settlement demand valid for a minimum of 30 days in an amount less than the amount of damages upon which the judgment was entered.

As used in this chapter:

(1) ”Billing period” means the payment cycle agreed to by the parties, or, in the absence of an agreement, the calendar month within which the work is performed.

(2) ”Contractor” includes, but is not limited to, an architect, engineer, real estate broker or agent, subcontractor or other person, who enters into any contract with another person to furnish labor and/or materials in connection with the erection, construction, completion, alteration or repair of any building or for additions to a building, by such contractor, or for the sale to such other person of any lands and premises, whether owned by such contractor or another, upon which such contractor undertakes to erect, construct, complete, alter or repair any building or addition to a building.

(3) ”Moneys or funds” includes, but is not limited to, the entire amount of all moneys or funds received by a contractor, as defined in this section, who, being the owner of the legal title to lands and premises, receives, in connection with a contract for the sale thereof and for the erection, construction, completion, alteration or repair of any building or addition thereon by such contractor, any moneys or funds by way of a loan or advance upon the security of such lands and premises for the purpose of such erection, construction, completion, alteration or repair, or who receives from the other contracting party or vendee any deposit or sum of money on account of the purchase or contract price, and no part of such moneys or funds shall be deemed or construed applicable to the payment of the cost or selling price of land, unless that part of the contract price or selling price applicable to cost or selling price of land, be specifically so stated in the contract.

(4) ”Owner” means a person who has an interest in the lands or premises upon which a contractor has undertaken to erect, construct, complete, alter or repair any building or addition to a building.

(5) ”Person” shall include a corporation, partnership, limited liability corporation or partnership, business trust, other association, estate trust, foundation or a natural person.

(6) ”Subcontractor” means a person who enters into a contract to furnish labor and/or materials to a contractor.

All moneys or funds received by a contractor in connection with a contract for the erection, construction, completion, alteration or repair of any building or for additions to a building and all moneys or funds received by a contractor in connection with a contract for the sale of land and the erection, construction, completion, alteration or repair of any building or addition thereon, shall be trust funds in the hands of the contractor.

No contractor, or agent of a contractor, shall pay out, use or appropriate any moneys or funds described in § 3502 of this title until they have first been applied to the payment of the full amount of all moneys due and owing by the contractor to all persons (including surveyors and engineers) furnishing labor or material (including fuel) for the erection, construction, completion, alteration or repair of, or for additions to, such building, whether or not the labor or material entered into or became a component part of any such building or addition and whether or not the same were furnished on the credit of such building or addition or on the credit of such contractor.

Failure of a contractor, or of an agent of a contractor, to pay or cause to be paid, in full or pro rata, the lawful claims of all persons, firms, association of persons or corporations (including surveyors and engineers), furnishing labor or material (including fuel), as required by § 3503 of this title, within 30 days after the receipt of any moneys or funds for the purposes of § 3502 of this title, shall be prima facie evidence of the payment, use or appropriation of such trust moneys or funds by the contractor in violation of the provisions of this chapter.

Whoever, being a contractor, or any agent of a contractor, pays out, uses or appropriates, or consents to the paying out, use or appropriation of any moneys or funds received for any of the purposes specified in § 3502 of this title, prior to paying in full or pro rata to the extent of the moneys or funds so received, all the lawful claims of all persons (including surveyors and engineers) furnishing labor or materials (including fuel), as prescribed by § 3503 of this title, shall be fined not more than $1,000 or imprisoned not more than 3 years, or both.

(a) Each construction contract awarded by an owner shall include:

(1) A payment clause which obligates the owner to pay the contractor for satisfactory performance under the contract within 30 days of the end of the billing period;

(2) An interest penalty clause which obligates the owner to pay the contractor an interest penalty on amounts due in the case of each payment not made in accordance with the payment clause included in the contract pursuant to paragraph (a)(1) of this section;

(3) The clause required by this subsection shall not be construed to impair the right of the owner to include in its contracts provisions which permit the owner to retain a specified percentage of each progress payment otherwise due to a contractor for satisfactory performance under the contract without incurring any obligation to incur an interest penalty, in accordance with the terms and conditions agreed to by the parties to the contract. In such a case, the owner must provide written notice to contractor as to why payment is being withheld within 7 days of the date required for payment to the contractor.

(b) Each construction contract awarded by a contractor shall include:

(1) A payment clause which obligates the contractor to pay the subcontractor and each supplier for satisfactory performance under the subcontract within 30 days out of such amounts as are paid to the contractor; and

(2) An interest penalty clause which obligates the contractor to pay the subcontractor and each supplier an interest penalty on amounts due in the case of each payment not made in accordance with the payment clause included in the contract pursuant to paragraph (b)(1) of this section.

(c) The interest penalty shall apply to the period beginning on the day after the required date and ending on the date on which payment of that amount due is made and shall be computed at the legal rate in effect at the time the obligation to pay a late payment interest penalty accrues. Any amount of an interest penalty which remains unpaid at the end of any 30-day period shall be added to the principal amount of the debt and thereafter interest penalties shall accrue on such amount.

(d) The clauses required by subsection (b) of this section shall not be construed to impair the right of the contractor to include in its subcontracts provisions which permit the contractor to retain a specified percentage of each progress payment otherwise due to a subcontractor and each supplier for satisfactory performance under the subcontract without incurring any obligation to incur an interest penalty, in accordance with the terms and conditions agreed to by the parties to the contract. In such a case, the contractor must provide written notice to the subcontractor or supplier as to why payment is being withheld within 7 days of the date required for payment to the subcontractor or supplier.

(e) If it is determined by a court of competent jurisdiction that a payment withheld pursuant to paragraph (a)(3) or subsection (d) of this section was not withheld in good faith for reasonable cause, the court may award reasonable attorney’s fees to the prevailing party. In any civil action brought pursuant to this section, if a court determines after a hearing for such purpose that the cause was initiated, or a defense was asserted, or a motion was filed or any proceeding therein was done frivolously or in bad faith, the court shall require the party who initiated such cause, asserted such defense, filed such motion or caused such proceeding to be had to pay the other party named in such action the amount of the costs attributable thereto and reasonable expenses incurred by such party, including reasonable attorney’s fees.

(f) Once a contractor has made payment to the subcontractor or supplier according to the payment terms of the construction contract or the provisions of this section, future claims for payment against the contractor or any surety of the contractor by parties owed payment from the subcontractor or supplier shall be barred.

(a) The owner shall pay the contractor strictly in accordance with the terms of the contract.

(b) If the terms of the contract do not contain a term governing payment, the contractor shall be entitled to submit an invoice to the owner for payments at the end of the billing period for:

(1) Work already commenced but not fully completed and/or,

(2) Materials already supplied,

if the agreed upon work is completed at the end of such billing period.

(c) If the contract between the owner and a contractor, or between contractors, does not contain a provision governing when invoices may be submitted, a contractor shall be entitled to submit a final invoice for payment in full when the agreed-upon work is fully completed. The owner shall pay all undisputed amounts owed to the contractor within 30 days after the end of the billing period or 30 days after delivery of the invoice, whichever is later. This subsection shall not be construed to impair the right of an owner to include in a contract provisions that permit the owner to retain a specified percentage of each progress payment otherwise due to a contractor and each supplier for satisfactory performance under the contract.

(d) If subcontractor payment terms are not specified in the contract between the owner and a general or prime contractor, or in the contract between the general or prime contractor and a subcontractor, or in the contract between the subcontractors, a general contractor, prime contractor or subcontractor shall pay all undisputed amounts owed to its subcontractors, suppliers and/or materialmen within 15 days after receipt by the general contractor, prime contractor or subcontractor of each payment received for work performed or materials supplied by its subcontractors, suppliers and/or materialmen. This subsection shall not be construed to impair the right of an owner or contractor to include in a subcontract provisions that permit the owner or contractor to retain a specified percentage of each progress payment otherwise due to a subcontractor and each supplier for satisfactory performance under the subcontract.

(e) It shall be against public policy and shall be void and unenforceable for any provision of a construction contract or subcontract agreement to:

(1) State that a contractor assumes the risk of nonpayment of the owner;

(2) Require a contractor to waive any statutory or other right to commence litigation or arbitration until payment is made to the general or prime contractor;

(3) Make subject to payment by the owner the obligation of a contractor and its surety under any payment or performance bond to make any payment to a claimant under such bond;

(4) State that a contractor relies on the credit of the owner and not on the credit of the general or prime contractor or of a bonding company; or

(5) Require a dispute or claim between the contractor and subcontractor to be governed or subject to the laws of a state other than Delaware or require litigation, arbitration, mediation or other dispute resolution processes to occur in a state other than Delaware.

(f) This section shall not apply to:

(1) Public works contracts awarded under Chapter 69 of Title 29;

(2) Contracts for the erection of 6 or fewer residential units which are under construction simultaneously, or for the alteration or repair of any single residential unit; or

(3) Contracts for the purchase of materials by a person performing work on that person’s own real property.

a) If an owner or contractor disputes any amounts stated in an invoice for payment, then:

(1) The party disputing the invoice must notify the other party in writing within 7 days of the receipt of the disputed invoice; and

(2) The party disputing the invoice must be specific as to those items within the invoice that are disputed.

(b) If notice of dispute is not given within the time required by this section, then the invoice is deemed to be accepted as submitted.

(c) If notice of dispute is not given within the time required by this section, such lack of notice does not constitute acceptance of the work performed.

(d) This section shall not apply:

(1) To public works contracts awarded under Chapter 69 of Title 29;

(2) To contracts for the erection of 6 or fewer residential units which are under construction simultaneously, or for the alteration or repair of any single residential unit;

(3) To contracts for the purchase of materials by a person performing work on that person’s own real property; or

(4) Where the terms of a contract specify a different procedure for disputing claims for payment.

(e) This section shall not apply where the terms of a contract between a general or prime contractor and a subcontractor specify a difference procedure for disputing claims for payment.

(a) Award of attorneys’ fees and arbitration costs. — If arbitration or litigation is commenced to recover payment due under § 3507 of this title and it is determined that the owner, contractor or subcontractor has failed to comply with the payment terms of § 3507 of this title, the arbitrator or court shall award damages due equal to the amount that is determined by the arbitrator or court to have been wrongfully withheld. An amount shall not be deemed to have been wrongfully withheld to the extent that it bears a reasonable relationship to the value of any disputed amount or claim held in good faith by the owner, contractor or subcontractor against whom the contractor or subcontractor is seeking to recover payment.

(b) Absent any agreements to the contrary between the parties, the arbitrator in any arbitration proceeding arising under this chapter shall award to the substantially prevailing party its reasonable attorneys’ fees, arbitration costs and expenses for expert witnesses.

(c) This section shall not apply to:

(1) Public works contracts awarded under Chapter 69 of Title 29;

(2) Contracts for the erection of 6 or fewer residential units which are under construction simultaneously, or for the alteration or repair of any single residential unit; or

(3) Contracts for the purchase of materials by a person performing work on that person’s own real property.

(d) This section shall not apply where the terms of a contract between a general or prime contractor and subcontractor specifies different terms regarding the award of attorney fees and litigation costs in an arbitration or judicial proceeding.

(f) For public works contracts as defined by § 6902 of this title, the following shall apply:

(1) The agency agent, by mutual agreement, may make progress payments on contracts of less than 90 days and shall make monthly progress payments on all other contracts as provided for in this paragraph.

The agency agent shall approve or disapprove an estimate of the work submitted for payment within 7 days from the date of submission of the written application for payment. If the agency agent approves the estimate of work, such estimate shall be certified for payment. If the agency agent disapproves the estimate of work, the agency or the agency agent shall issue a specific written finding within 21 days from the submission of the applicant for payment setting forth those items in detail in the estimate of the work that are not approved for payment under the contract. The agency may withhold 150% of the amount of expenses the agency reasonably expects to incur, as approved by the Director of the Office of Management and Budget, in correcting the deficiency set forth in the written finding. The progress payments shall be paid on or before 21 days after the estimate of work is certified and approved. If the approval of a federal agency is required, the payment shall be deemed timely if the payment is made within 10 days of a required federal agency’s approval.

(2) An agency agent, contractor or subcontractor may decline to approve and certify a billing or estimate or a portion of a billing or estimate for any of the following reasons:

a. Unsatisfactory job progress;

b. Defective construction work of materials not remedied;

c. Disputed work or materials;

d. Failure to comply with material provisions of the contract;

e. Third party claims filed or reasonable evidence that a claim will be filed;

f. Failure of the contractor or subcontractor to make timely payments for labor, equipment or materials;

g. Damage to the agency, contractor or subcontractor;

h. Reasonable evidence that the construction cannot be completed for the unpaid balance of the construction contract; or

i. Retainage of funds.

(3) The retainage, as allowed by § 6962(d)(5) of this title, shall be retained by the agency as a guarantee for complete performance of the contract, to be paid to the contractor within 60 days after completion or filing notice of completion of the contract or within 30 days of a required federal agency’s final approval or certification. Retention of payments by an agency longer than 60 days after final completion and acceptance requires a specific written finding by the agency of the reasons justifying the delay in payment. Such written finding shall be furnished by the agency within 10 days after completion or filing notice to the contractor or within 10 days of the required federal agency’s final approval or certification. No agency may retain any moneys after 60 days in an amount exceeding 150% of the necessary amount to pay the expenses the agency reasonably expects to incur in order to pay or discharge the expenses determined by the agency in the finding justifying the retention of moneys.

(4) If a progress payment to a contractor is delayed by more than 21 days after the date of the agency agent’s approval or the final payment to a contractor is delayed by more than 60 days after the date of the final submission, the contractor may require the payment of interest by such agency, except for periods of time during which payment is withheld pursuant to paragraph (f)(2) of this section, beginning on the twenty-second day for progress payments and on the sixty-first day for final payment; provided, however, that:

a. Presentment is deemed made when an invoice or bill is received by that agency or agency agent, provided that the invoice or bill is received in a form consistent with the State Accounting Manual and regulations issued by the Director of the Office of Management and Budget and the Secretary of Finance. Such forms shall be included in the project’s bid documents.

b. The contractor may not require interest with respect to any portion of such invoice or bill if such portion is controverted on reasonable grounds by the state agency or agency agent, provided that the agency notifies the contractor in writing, within the 21-day period for progress payments or 60 days for final payments, of the reason or reasons for controverting the invoice or bill.

c. A vendor may require that interest under this subsection commence from the end of the 21-day period for progress payments or the 60-day period for final payment and continue until payment. All interest charges under this chapter shall be paid by the agency receiving the goods or services from the contractor. Such interest shall be calculated by the contractor in dollar amounts and expressly billed as such to the agency receiving goods or services from the contractor.

d. A contractor may require that interest under this subsection accrue on the unpaid balance at a rate not to exceed 2 percent above the prime interest rate as established by the Federal Reserve.

e. Agencies liable for interest payments under this subsection shall be authorized to make such payments from amounts appropriated for “contractual services” in the event an unencumbered balance shall exist in such line. In the case of agencies of public or higher education, such payment shall be made from local funds or state general funds not restricted to another purpose. The Office of Management and Budget shall establish procedures according to which interest payments under this subsection are recorded separately from other expenditures for contractual services.

f. Interest payments to be made by the agency receiving goods or services may be imposed upon a different agency when, in the sound discretion of the Director of the Office of Management and Budget and the Controller General, the receiving agency demonstrates that some other agency or agencies bear greater responsibility for causing the delay which occasioned the payment of interest, in which case the responsible agency or agencies shall reimburse the receiving agency for interest charges.

(5) The agency, contractor or subcontractor may change the time periods outlined in this subsection only if:

a. Prior written approval is given by the Director of the Office of Management and Budget;

b. The public works contract specifically provides in a clear and conspicuous manner for a later payment defined by a specific number of days after certification and approval; and

c. All plan documents, including bid plans and construction plans, shall permanently display, in clear and conspicuous type, the following legend or substantially similar language:

NOTICE OF EXTENDED PAYMENT PROVISION

This contract allows the agency, contractor and subcontractor to make payment within ____ days after certification and approval of billings and estimates. Such changes shall also be indicated in a clear and conspicuous manner by contractors and subcontractors on all contracts with subcontractors and material suppliers.

(6) An agency may change the time period to certify and approve a billing or estimate only if:

a. Prior approval is given by the Director of the Office of Management and Budget;

b. The public works contract specifically provides in a clear and conspicuous manner for an extended time period within which a billing or estimate shall be certified or approved, defined by a specific number of days after the agency has received the billing or estimate; and

c. All plan documents, including bid plans and construction plans, shall include, in clear and conspicuous type, the following legend or substantially similar language:

NOTICE OF EXTENDED CERTIFICATION AND APPROVAL PERIOD PROVISION

This contract allows the agency to certify and approve billings and estimate within ____ days after the billings and estimates are received from the contractor.

Such changes shall also be indicated in a clear and conspicuous manner by contractors and subcontractors on all contracts with subcontractors and material suppliers.

(7) The contractor shall pay the contractor’s subcontractors or material suppliers and each subcontractor shall pay the subordinate subcontractors or material supplier within 21 days of receipt of each progress payment, unless otherwise agreed to in writing by the parties, the respective amounts allowed the subordinate or subcontractor or material supplier on account of the work performed by subordinate contractors and material suppliers, to the extent of each subordinate subcontractor’s or material suppliers interest therein, except that no contract for public works may materially alter the rights of any contractor, subcontractor, subordinate subcontractor or material supplier to receive prompt and timely payment as provided under this subsection or Chapter 35 of Title 6. If a progress or final payment to a subordinate subcontractor or material supplier is delayed by more than 21days after receipt of a progress or final payment by the contractor or subcontractor, the subordinate subcontractor or material supplier may require payment of interest by the contractor or subcontractor except for periods of time during which payment is withheld pursuant to paragraph (2) of this section, beginning on the twenty-second day, provided, however, that:

a. Presentment is deemed made when an invoice or bill is received by that contractor or subcontractor, provided that the invoice or bill is received in a form consistent with the contractor’s or subcontractor requirements.

b. The subcontractor or material supplier may not require interest with respect to any portion of such invoice or bill if such portion is controverted on reasonable evidence by the contractor or subcontractor, provided that the contractor or subcontractor notifies the vendor in writing within the 21-day period specified in this subsection of the reason or reasons for controverting the invoice or bill.

c. A subordinate subcontractor or material supplier may require that interest under this subsection commence from the end of the 21-day period and continue until payment. All interest charges under this chapter shall be paid by the contractor or subcontractor and shall not be charged to any state agency. Such interest shall be calculated by the subordinate subcontractor or material supplier in dollar amounts and expressly billed as such to the contractor or subcontractor.

d. A subordinate subcontractor or material supplier may require that interest under this subsection accrue on the unpaid balance at a rate not to exceed 2 percent above the prime interest rate as established by the Federal Reserve.

(8) In any action or arbitration brought to collect payments or interest under this subsection, the arbitrator or court shall award damages equal to the amount that is determined by the arbitrator or court to have been wrongfully withheld. An amount shall not be deemed to have been wrongfully withheld to the extent it bears a reasonable relation to the value of any disputed amount or claim held in good faith by the agency contractor or subcontractor against whom the contractor, subcontractor of material supplier is seeking to recover payment.