Maryland Prompt Payment Guide and FAQs

(a) In this subtitle the following words have the meanings indicated.

(b)

(1) “Contract” means an agreement of any kind or nature, express or implied, for doing work or furnishing materials, or both, for or about a building.

(2) “Contract” includes an agreement for:

(i) The erection, repair, rebuilding, or improvement of a building;

(ii) The drilling and installation of wells to supply water;

(iii) The construction or installation of any swimming pool or fencing;

(iv) The grading, filling, landscaping, and paving of the premises;

(v) The installation of waterlines, sanitary sewers, storm drains, or streets; or

(vi) The erection, repair, rebuilding, or improvement of a wharf.

(c) “Contractor” means a person who has a contract with an owner.

(d) “Owner” means:

(1) The owner of the land; or

(2) An owner’s tenant for life or for years, provided the tenant enters into the contract with the contractor.

(e)

(1) “Subcontractor” means a person who has a contract with anyone except the owner or the owner’s agent.

(2) “Subcontractor” includes a supplier.

(f) “Undisputed amount” means an amount owed on a contract for which there is no good faith dispute, including any retainage withheld.

(a) Except for work done or materials furnished under a contract enumerated in § 9-305 of this subtitle, a contractor or subcontractor who does work or furnishes material under a contract shall be entitled to prompt payment under subsection (b) of this section.

(b)

(1) If the contract is with an owner, the owner shall:

(i) If the contract does not provide for specific dates or times of payment, pay to the contractor undisputed amounts owed under the terms of the written contract, within the earlier of:

1. 30 days after the day on which the occupancy permit is granted; or

2. 30 days after the day on which the owner or the owner’s agent takes possession; or

(ii) If the contract provides for specific dates or times of payment, pay to the contractor undisputed amounts owed within 7 days after the date or time specified in the contract.

(2) Paragraph (1) of this subsection does not apply to any contract between the contractor and:

(i) The State;

(ii) A county;

(iii) A municipal corporation;

(iv) A board of education; or

(v) A public authority or instrumentality.

(3) If the contract is not with an owner, the contractor or subcontractor shall pay undisputed amounts owed to its subcontractors within 7 days after receipt by the contractor or subcontractor of each payment received for its subcontractors’ work or materials.

(a) In this section, “undisputed amounts” includes any retention proceeds that exceed the amount authorized to be retained under § 9-304 of this subtitle.

(b) In addition to any other remedy provided under any other provision of law, a court of competent jurisdiction, for good cause shown may:

(1) Award any equitable relief for prompt payment of undisputed amounts that it considers necessary, including the enjoining of further violations; and

(2) In any action, award to the prevailing party:

(i) Interest from the date the court determines that the amount owed was due; and

(ii) Any reasonable costs incurred.

(c) If a court determines that an owner, contractor, or subcontractor has acted in bad faith by failing to pay any undisputed amounts owed as required under § 9-302 of this subtitle, the court may award to the prevailing party reasonable attorney’s fees.

(a) In this section, “retention proceeds” means money earned but retained under the terms of a contract or subcontract:

(1) By an owner to guarantee performance of the contract by a contractor;

(2) By a contractor to guarantee performance of a subcontract by a subcontractor; or

(3) By a subcontractor to guarantee performance of a subcontract by another subcontractor.

(b) This section does not apply to:

(1) A contract in an amount less than $100,000; or

(2) A contract or subcontract for a project funded wholly or in part by or through the Department of Housing and Community Development.

(c) Except as provided in this section:

(1) If a contractor has furnished 100% security to guarantee the performance of a contract and 100% security to guarantee payment for labor and materials, including leased equipment:

(i) The retention proceeds under the terms of a contract may not exceed 5% of the contract price; and

(ii) The retention proceeds of any payment due under the terms of a contract from an owner to a contractor may not exceed 5% of the payment;

(2) The retention proceeds of any payment due under the terms of a contract from a contractor to a subcontractor may not exceed the percentage of retention proceeds from the owner to the contractor; and

(3) The retention proceeds of any payment due under the terms of a contract from a subcontractor to another subcontractor may not exceed the percentage of retention proceeds from the contractor to the subcontractor.

(d) This section may not be construed to prohibit the withholding of any amount due:

(1) From the owner to the contractor if the owner reasonably determines that the contractor’s performance under the contract provides reasonable grounds for withholding the additional amount;

(2) From the contractor to any subcontractor if the contractor reasonably determines that the subcontractor’s performance under the subcontract provides reasonable grounds for withholding the additional amount; or

(3) From a subcontractor to another subcontractor if the subcontractor determines that the other subcontractor’s performance under the subcontract provides reasonable grounds for withholding the additional amount.

(e) Undisputed retention proceeds retained by an owner under this section shall be paid within 90 days after the date of substantial completion, as defined by the applicable contract or subcontract.

This subtitle does not:

(1) Affect the rights of contracting parties under Subtitle 1 of this title;

(2) Apply to a contract for the construction and sale of a single family residential dwelling;

(3) Apply to any transaction under the Custom Home Protection Act, Title 10, Subtitle 5 of this article; and

(4) Apply to a home improvement contract by a contractor licensed under the Maryland Home Improvement Law.

In this subtitle, “invoice” means an invoice that meets the requirements of § 15-102 of this subtitle.

A contractor who submits an invoice for a procurement contract shall include in the invoice

(1) the contractor’s federal employer’s identification number or Social Security number;

(2) the procurement contract or purchase order number or another adequate description of the procurement contract; and

(3) any documentation required by regulation or the procurement contract.

It is the policy of the State to make a payment under a procurement contract within 30 days:

(1) after the day on which the payment becomes due under the procurement contract; or

(2) if later, after the day on which the unit receives an invoice.

(a) Except as provided in § 15-105 of this subtitle, interest shall accrue at the rate of 9% per annum on any amount that:

(1) is due and payable by law and under the written procurement contract; and

(2) remains unpaid more than 45 days after a unit receives an invoice.

(b) Interest shall accrue beginning on the 31st day after:

(1) the day on which payment becomes due under a procurement contract; or

(2) if later, the day on which the unit receives an invoice.

A unit is not liable under § 15-104 of this subtitle for interest:

(1) unless within 30 days after the date on the State’s check for the amount on which the interest accrued, the contractor submits an invoice for the interest;

(2) if a contract claim has been filed under Subtitle 2 of this title;

(3) accruing more than 1 year after the 31st day after the unit receives an invoice; or

(4) on an amount that represents unpaid interest.

The Governor shall resolve a dispute among units as to which unit is responsible for a delayed payment under a procurement contract.

After a unit pays a semifinal estimate on a procurement contract, the unit shall place any retainage remaining in its possession in an interest bearing escrow account.

(a) This section does not apply to any procurement contract funded with tax-exempt financing.

(b)

(1) Subject to the requirements of this section, a contractor under a procurement contract that a unit awards for construction is entitled to have retainage under the procurement contract placed in an escrow account if the contractor:

(i) elects that procedure in the procurement contract in the space provided for that election; and

(ii) submits to the unit an escrow agreement that meets the requirements of subsection (c) of this section.

(2) The procurement contract shall identify the escrow agent.

(c) The escrow agreement shall:

(1) be on a form that the unit provides;

(2) include the complete address of both the escrow agent and the surety;

(3) authorize the unit to pay retainage to the escrow agent; and

(4) be signed by:

(i) the contractor;

(ii) the surety for the contractor; and

(iii) the escrow agent.

(d) On compliance with the requirements of subsection (b) of this section, the unit shall pay the retainage to the escrow agent unless:

(1) federal money is involved and application of this section would jeopardize timely recovery of that federal money; or

(2) retainage is withheld for:

(i) lack of progress on the part of the contractor; or

(ii) other violations by the contractor.

(e) In accordance with the escrow agreement, a contractor may require an escrow agent:

(1) to invest the retainage placed in the escrow account; and

(2) to the extent the contractor is entitled to retainage under subsection (f)(2)(ii) of this section, to pay the earnings on the investment to the contractor.

(f)

(1) Retainage may be released to the contractor only as directed by the unit.

(2) At the time of final payment, the unit shall direct the escrow agent to settle the escrow account by distributing money in the escrow account in the following order:

(i) to the unit for any claim it may have against the contractor under the procurement contract;

(ii) unless waived by the Board, to the Comptroller for any claim exceeding $50 against the contractor by the State, a unit, or a State controlled governmental entity; and

(iii) to the contractor.

(a) In this section, “undisputed amount” means an amount owed by a contractor to a subcontractor for which there is no good faith dispute, including any retainage withheld.

(b) It is the policy of the State that, for work under a State procurement contract for construction:

(1) a contractor shall promptly pay to a subcontractor any undisputed amount to which the subcontractor is entitled; and

(2) a subcontractor shall promptly pay to a lower tier subcontractor any undisputed amount to which the lower tier subcontractor is entitled.

(c)

(1) A contractor shall pay a subcontractor an undisputed amount to which the subcontractor is entitled within 10 days of receiving a progress or final payment from the State.

(2) If a contractor withholds payment from a subcontractor, within the time period in which payment normally would be made, the contractor shall:

(i) notify the subcontractor in writing and state the reason why payment is being withheld; and

(ii) provide a copy of the notice to the procurement officer.

(d)

(1) If a subcontractor does not receive a payment within the required time period, the subcontractor may give written notice of the nonpayment to the procurement officer.

(2) The notice shall:

(i) indicate the name of the contractor, the project under which the dispute exists, and the amount in dispute;

(ii) provide an itemized description on which the amount is based; and

(iii) if known, provide an explanation for any dispute concerning payment by the contractor.

(e)

(1) Within 2 business days of receipt of written notice from a subcontractor, a representative of the unit designated by the procurement officer shall verbally contact the contractor to ascertain whether the amount withheld is an undisputed amount.

(2) If the representative of the unit decides that a part or all of the amount withheld is an undisputed amount, the representative of the unit shall instruct the contractor to pay the subcontractor the undisputed amount within 3 business days.

(3) The representative of the unit shall verbally communicate to the subcontractor the results of discussions with the contractor.

(4) If the contractor is instructed to pay the subcontractor and the subcontractor is not paid within the time instructed under paragraph (2) of this subsection, the subcontractor may report the nonpayment in writing to the procurement officer.

(f)

(1) If the subcontractor notifies the procurement officer under subsection (e)(4) of this section that payment has not been made, the representative of the unit shall schedule a meeting to discuss the dispute with the unit’s project manager, the contractor, and the subcontractor:

(i) at a time and location designated by the representative of the unit; but

(ii) not later than 10 days after receiving notice from the subcontractor under subsection (e)(4) of this section.

(2) The purpose of the meeting is to establish why the contractor has not paid the subcontractor in the required time period.

(3) The representative of the unit shall require the parties to provide at the meeting any information that the representative believes necessary to evaluate the dispute.

(4) If the representative of the unit determines that the contractor is delinquent in payment of an undisputed amount to the subcontractor, further progress payments to the contractor may be withheld until the subcontractor is paid.

(5) If payment is not paid to the subcontractor within 7 days after the representative of the unit determines that the contractor is delinquent in paying the subcontractor under this subsection, the representative shall schedule a second meeting to address the dispute:

(i) at a time and location designated by the representative of the unit; but

(ii) not later than 5 days after the close of the 7-day period.

(6) If, at the completion of the second meeting, the representative of the unit determines that the contractor continues to be delinquent in payments owed to the subcontractor, the representative:

(i) shall order that further payments to the contractor not be processed until payment to the subcontractor is verified;

(ii) may order that work under the contract be suspended based on the failure of the contractor to meet obligations under the contract; and

(iii) subject to paragraph (7) of this subsection, may require that the contractor pay a penalty to the subcontractor, in an amount not exceeding $100 per day, from the date that payment was required under subsection (e)(2) of this section.

(7) A penalty may not be imposed under paragraph (6)(iii) of this subsection for any period that the representative of the unit determines the subcontractor was not diligent in reporting nonpayment to the procurement officer.

(g)

(1) A contractor or a subcontractor may appeal a decision under subsection (f)(6) of this section to the procurement officer.

(2) The contractor shall comply with the procurement officer’s decision.

(h) An act, failure to act, or decision of a procurement officer or a representative of a unit concerning a payment dispute between a contractor and subcontractor or between subcontractors under this section may not:

(1) affect the rights of the contracting parties under any other provision of law;

(2) be used as evidence on the merits of a dispute between the unit and the contractor or the contractor and subcontractor in any other proceeding; or

(3) result in liability against or prejudice the rights of the unit.

(i) A decision of a procurement officer or a representative of the unit designated by the procurement officer under this section is not subject to judicial review or the provisions of Part III of this subtitle.

(j)

(1) A unit shall include in each State procurement contract for construction a provision:

(i) governing prompt payment to subcontractors; and

(ii) requiring inclusion of a similar provision in each subcontract at any tier.

(2) The contract provision shall establish procedures and remedies for the resolution of payment disputes similar to the process and remedies prescribed in subsections (c) through (g) of this section.