A new law has recently gone into effect in Massachusetts that drastically changes the relationships between private owners, contractors and subcontractors; and some people are going to suffer severe financial hardship as a result. For some inexplicable reason, the Commonwealth of Massachusetts has decided to interfere in what has been traditionally been the private right to contract. The new law has three main points; each more insidious than the next.

First, “pay when paid” and/or “pay if paid” provisions commonly found in subcontracts are now prohibited by statute in the Commonwealth of Massachusetts. Many general contractors simply are unable to pay their subcontractors until they receive payment from the owner. Thus, they write their subcontracts to make the subcontractor’s payment due a reasonable time after the contractor receives payment from the owner. Now, “every contract for construction shall provide reasonable time periods within which” an application for payment shall be submitted, approved and paid. Contract provisions that first require that the contractor to receive payment from the owner are void except in cases where the subcontractor has performed defective work or is insolvent.

Second, general contractors must abide by the time requirements for the review and approval of pay applications or suffer an extremely harsh result. “An application for a periodic progress payment which is neither approved nor rejected within the time period shall be deemed to be approved.” In other words, if a subcontractor’s application for payment is supposed to be approved or rejected by Tuesday but the general contractor does not review it until Wednesday, then the general contractor must pay the subcontractor the entire amount of the application – even if said amount is not due. In theory, a subcontractor can request payment for 100% of the subcontract amount – even if he is only 10% complete – and the general contractor will be forced to pay the entire subcontract amount just because he was a day late reviewing the application.

Third, the new law applies the same “deemed approved” approach to change orders. This provision regarding change orders has the most potential to cause havoc. In theory, even if a subcontractor’s payment is issued early, the general contractor will eventually recoup that money once the project is complete. With the automatic approval of change orders, however, the general contractor could end up paying a subcontractor for work for which the owner refuses to pay the general contractor. Thus, the general contractor may end up paying a subcontractor a substantial sum out of his own pocket just because a document got lost on someone’s desk, was out sick on the wrong day or simply had a lot of fires to put out in a short period of time and did not keep up with the routine paperwork.

Worst of all – assuming that most general contractors don’t read the monthly law reporter – this new law may catch some people by surprise. Therefore, it will be interesting to see where this all leads as we head into the new year.

If you have any questions about this new law or have fallen within its clutches, please give me a call at (203) 640-8825.

(All quotes above were taken from the Commonwealth of Massachusetts, An Act Promoting Fairness in Private Construction Contracts.)