Capturing the Sun: State Prompt Payment Acts’ Effects on Solar Construction

As the energy sector continues to expand, developers and contractors looking to expand their footprint are crossing state lines to construct energy projects. This is a good strategy for applying the same, successful strategies to a broader prospective customer base. However, while there are issues faced uniquely by energy project developers, the construction contracts for energy projects are subject to the same limitations as construction contracts for other types of development. Understanding the implications of state Prompt Payment Act (PPA) laws is essential for successful solar system construction contracts. These laws are designed to ensure timely payments to contractors and to promote fair practices in the construction industry. While many developers self-perform construction or sell projects before construction has commenced, when a construction contract is required, developers should consider the requirements for a construction contract under the laws of the state where the project is to be located.

We will focus on considerations of the Prompt Payment Act by reference to restrictions and rights available to solar projects in Rhode Island, Massachusetts, Connecticut, New Jersey, New York, and Pennsylvania, though consideration of all laws is required in the states where either party or the project is located. Each of these states has its own Prompt Payment Act with unique provisions that affect contract negotiations. Key considerations include: (i) whether the customer (i.e. the project owner) is a public or private entity; (ii) payment timelines; and (iii) restrictions on language that is included in contracts. Being aware of these state-specific regulations ensures compliance and helps set realistic expectations for payment processes.

Applicability: Public and Private Owner

In some states, the required and prohibited terms in a construction contract may vary depending on whether the owner is a public entity (such as a municipal or state government, or any school, agency, office, or department operated by a municipal or state government) or a private entity (such as a for-profit business or otherwise not government affiliated); further, some states’ PPA rules only apply to construction for either public owners or private owners. For example, New Jersey’s PPA applies to all agreements to improve real property within the state, with “improve” being defined broadly to include building, altering, repairing, or demolishing any structure, including design and services furnished by an architect, engineer, land surveyor, or landscaper, making it applicable to most, if not all, contractors that a solar developer engages in connection with the construction and maintenance of a solar array. Whereas in Rhode Island, the PPA applies to contracts for public owners only, leaving solar developers the ability to freely negotiate payment terms with its contractors for projects to be owned privately. In Massachusetts, there are different provisions in contracts for projects for public and private owners, but both are regulated by the PPA.

Payment Terms and Schedule

Some of the most important issues in a construction contract relate to payment: the timing of payments, withholding of some or all of a payment, and interest on late payments.

Schedule

The dates on which payment must be made is of course an important term of the construction contract. Specifically, a contract should identify the trigger event for payment and the time frame during which the party must make payment, typically a number of days after such event. Generally, these are commonly structured as fixed monthly payments or milestone payments, where construction progress triggers the payment obligation. However, certain states allow for “pay-when-paid” provisions, which permit the general contractor to calculate their payment obligation based on when the general contractor is paid. Even when using pay-when-paid provisions, the payment obligation is still contingent upon receipt of the subcontractor’s invoice for the monthly payment or milestone payment; the owner will not be obligated to pay the general contractor until they receive the subcontractor’s invoice from the general contractor (or an invoice from the general contractor that incorporates the subcontractor’s work).

Massachusetts explicitly prohibits the concept of pay-when-paid, except in very limited circumstances; specifically, pay-when-paid provisions may apply if the owner does not pay the general contractor as a result of the applicable subcontractor’s failure to perform its duties under its contract with the general contractor, so long as the subcontractor has first received fourteen (14) days written notice of its failure to perform under the applicable agreement. Pay-when-paid is also permitted if the owner becomes insolvent, but only if the general contractor filed a notice of contract under M.G.L. c. 254, notified the subcontractor of the identity of the owner in writing prior to the first application for payment, filed a statement of amount due, commenced a civil action to enforce the lien created by the owner’s nonpayment, and continues to pursue all remedies to obtain payment.

Pennsylvania requires that the general contractor disclose to its subcontractors the payment terms between the general contractor and owner in order for a pay-when-paid provision to be valid; if the general contractor does not indicate in the agreement when the general contractor is supposed to receive payment from the owner, the law provides that it will be assumed that the owner made timely payment to the general contractor.

Retainage

Many state PPAs allow for retention of a portion of each payment as “retainage,” where the retainage is held until project completion. The parties should negotiate the percentage of payments that may be held and the conditions for release. The maximum percentage to be withheld by a general contractor from subcontractors is typically less than ten percent (10%), although in New York retainage can be twenty percent (20%) if the project is for a public owner, the public owner waives the requirement for a bond, and the total contract price for all work under a project is less than one hundred thousand dollars ($100,000); outside of the limited scenario, retainage in New York for projects for all other public owners and private owners is capped at five percent (5%). New York also provides that the general contractor is not permitted to retain from subcontractors more than the owner retains from their payments to the general contractor; therefore, if the owner does not retain any amount, the general contractor cannot take retainage from its subcontractors.

The conditions under which retainage is released are generally tied to the completion of construction, but the different states define what completion means. Pennsylvania, New York, and Connecticut require payment of retainage after final acceptance or approval of the construction by the customer (i.e. owner). In Massachusetts, a general contractor is required to give a public owner notice of a project being completed and the owner must prepare a final estimate of all amounts due to the general contractor within thirty (30) days of the owner’s receipt of such notice.  If the general contractor accepts the final estimate from the owner, the owner is then required to release the retainage to the general contractor within thirty-five (35) days of the general contractor’s acceptance of the final estimate.  Thereafter, the general contractor must release the applicable portion of that retainage to each subcontractor.

Rhode Island law, by comparison, permits a much more robust process for payment of retainage. First, the general contractor submits a notice of substantial completion to the owner, who must then accept or reject the notice of substantial completion within fourteen (14) days of receipt. If accepted, the owner must then provide the general contractor with a punch list of all incomplete or defective tasks, if any; the general contractor would then delegate those tasks down to its subcontractors. Sixty (60) days after the general contractor initially submitted the notice of substantial completion, the general contractor may submit an application for payment which identifies all of the incomplete and defective work items that the owner had identified that have since been completed, repaired, and delivered. The owner would then either accept or reject the application for payment and, if accepted, make payment to the general contractor, who would then in turn be required to make payment to its subcontractors.

Interest

It is standard practice to have interest apply to late payments under a construction agreement, like most other contracts; the percentage rate permitted and the time for when interest may begin to accrue will vary state to state. The scope of the laws restricting interest also varies significantly; for example, some states, like Pennsylvania, New York, and New Jersey, only speak to public owner projects; Pennsylvania and Connecticut provide for a notice or cure period after the due date before the interest can begin accruing; and New Jersey requires the interest due to reach at least five dollars ($5) before it can be charged to the payor. Each state discussed herein other than Connecticut (and Rhode Island which is silent on interest) has a variable interest rate which is based on the then-current rate set by specific governmental bodies like the Federal Reserve Bank of Boston for Massachusetts and the State Treasurer for New Jersey; by contrast, Connecticut uses a fixed rate of one percent (1%) per annum.

Conclusion

Navigating the intricacies of solar system construction contracts requires a thorough understanding of state construction laws, including the Prompt Payment Acts and their implications on contracts. In addition to the foregoing, there are also other critical restrictions, which relate to lien releases, invoice requirements, and change order procedures.  If there is another industry slowdown, similar to the logistics delays that slowed down construction in 2020, controlling payment terms may be critical to survival of contractors adhering to strict deadlines. By focusing on key points, such as the timing for payment, retainage, and interest, stakeholders can create robust agreements that foster collaboration and minimize risks. As the solar industry continues to expand, well-structured contracts will be essential for ensuring timely payments and successful project completion.

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