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Prompt payment laws have been enacted in some form or another in nearly every state. These laws are meant to ensure that contractors, subs, and suppliers are paid within a reasonable time on construction projects. Failure to do so can result in the award of interest penalties and attorney fees. However, these laws are strictly construed, and timing is crucial for all parties.

Take, for example, a recent case Ohio Court of Appeals opinion. In that case, the court dismissed a material supplier’s prompt payment claim against a subcontractor, because the supplier had failed to submit their invoices in time to be included in the sub’s payment application.

Ohio’s private prompt payment provisions

Ohio Prompt Payment Act on private construction projects was enacted in 1993 to ensure timely payment to subcontractors and suppliers. The specific provision governing the timing of such payments can be found under  §4113.61(A):

“If a subcontractor or material supplier submits an application or request for payment or an invoice for materials to a contractor in sufficient time to allow the contractor to include the application, request, or invoice in the contractor’s own pay request submitted to an owner, the contractor, within ten calendar days after receipt of payment from the owner for improvements, shall pay to the…

(b) Material supplier, an amount equal to all or that portion of the invoice for materials which represents the materials furnished by the material supplier.”

For subs and suppliers, this seems relatively straightforward. Once they submit an invoice, they expect to be paid by their hiring party within 10 days after they receive payment. However, an often-overlooked aspect of this is the requirement to submit an invoice “in sufficient time to allow the contractor to include” the invoice in their pay application.

Supplier files prompt pay claim against sub for late payments

The case in question is Broadway Concrete Invs., LLC v. Masonry Contracting Corp.

Project Snapshot

Case Western Reserve University had hired Gilbane as a general contractor for the construction of the Nord Family Greenway. The excavation and concrete work was subbed out to Platform who, in turn, subbed out the the precast concrete work to MCC. MCC’s material supplier was Pompili under a purchase order for a little over $350K.

As you can guess, payment issues arose, and Pompili eventually filed suit to recover an unpaid balance of $82,388.51. The lawsuit involved the foreclosure of a mechanics lien claim, breach of contract, and violations under the Ohio Prompt Payment Act. For the purposes of this article, we’ll focus on the prompt payment claims, under which Pompili asserted that since their invoices were not paid within the requisite 10-day period.

The trial court concluded that MCC had indeed violated the Act. MCC had submitted a pay app for $50,000 before Pompili had completed any work, which was paid in October of 2016. Pompili had submitted their first invoice for shop drawings in January of the following year. Although MCC had received payment for that work, Pompili wasn’t paid until May.

The same sequence of events happened for MCC’s second and third pay apps. The trial court reasoned that MCC had been “prepaid” for Pompili’s work, and since payment wasn’t made within 10 days of their invoices, this was a violation of the Prompt Pay Act. Thus, Pompili was awarded over $21,000 in interest penalties (18%), and over $100,000 in attorney fees. Keep in mind, that the unpaid balance claimed was only $82,000. MCC appealed the decision.

Claim dismissed by Appellate Court: Invoices weren’t submitted prior to the sub’s pay app

The Appeals Court rejected the trial court’s “prepayment rationale,” stating that the language of the Act is clear and unambiguous.

There are three things that must occur in order to make a subcontractor liable for a prompt pay violation:

  1. Supplier submits an invoice to a sub in time for the sub to include the invoice in their pay app
  2. Subcontractor receives payment on the pay app
  3. Subcontractor fails to pay the supplier’s invoice within 10 days of receipt of payment on the pay app

The 10-day payment clock begins to run on the date the sub receives payment on an application that contains the invoice from a supplier. According to the trial court’s interpretation of the statute, MCC was required to pay Pompili from payments received on a pay app that didn’t include Pompili’s invoices.

The trial court’s finding that MCC was late with every payment to Pompili because it was prepaid for Pompili’s work is contrary to the Act, which clearly provides that the 10-day prompt payment obligation begins to run only after the subcontractor receives payment on a pay application that included the material supplier’s invoice.

Thus, the Appellate Court reversed the trial court’s decision that MCC had violated the Act, along with the award of interest and attorney’s fees under the Act as well.

Timely invoices crucial for Ohio prompt pay claims

As mentioned above, leveraging your state’s prompt payment laws is a great way for contractors to ensure timely payment.

But entitlement to late payment interest isn’t automatic. Submitting timely invoices is crucial. If you think about it practically, if a particular invoice isn’t submitted before the contractor submits their pay app, the amount requested and paid is likely allocated elsewhere. And — as this case makes clear —arguing that the contractor was “prepaid” for work performed under a yet-to-be-submitted invoice is a lost cause.

From a higher-tiered contractor perspective, the only way to protect against claims under OH’s prompt pay requirements is organized documentation. That way you know when the 10-day deadline begins to tick when lower-tier invoices are submitted.