By Karalynn Cromeens, Cromeens Law Firm PLLC

For subcontractors, managing cash flow is one of the most pressing challenges in the construction industry. The unpredictable nature of payments, coupled with disputes and delays, can often create financial strain that impacts not only ongoing projects but also the very foundation of a business. However, there is a critical tool at your disposal that can significantly alleviate these challenges and streamline your collection strategies—prompt payment laws.

These laws are designed to protect subcontractors and ensure timely payments for work done. By understanding and using prompt payment laws, contractors can improve cash flow, reduce the pains of delayed invoices, and secure better leverage when handling payment disputes.

What Are Prompt Payment Laws?

Prompt payment laws vary by state but aim to ensure that construction businesses— including subcontractors—receive timely payments for their work. These laws ensure project owners and general contractors make payments within a specific time frame once a payment application or invoice is approved. Failure to issue timely payments can result in financial penalties, such as interest on late payments.

Why Prompt Payment Laws Matter to Cash Flow

• Timely Payments Keep Projects Moving: Prompt payment laws address one of the most significant cash flow disruptors in the industry—payment delays. By emphasizing timeliness, these laws help subcontractors maintain steady cash flow, making sure that operational costs such as payroll, materials, and equipment are covered.
• Interest on Late Payments: Late payments can cause big headaches for subcontractors, from being unable to keep the project moving forward to financial hits like late fees or taking out loans to cover cash gaps. Luckily, prompt payment

laws let contractors charge interest on overdue payments, helping them recover some costs and soften the blow of delays.

• Leverage to Stop Work Without Breaching the Contract: One of the most overlooked but powerful benefits of prompt payment laws is the ability to safely stop work without breaching contract terms when payments are not received on time. This offers subcontractors vital bargaining power while minimizing risk.

Spotlight on Texas Prompt Payment Law

While prompt payment laws exist in various states, some, like Texas, stand out due to their clear and efficient implementation. The Texas Prompt Payment Act gives subcontractors important protections, helping them keep better control of their cash flow.

Key Highlights of the Texas Prompt Payment Act

• Interest on Late Payments: Under Texas law, unpaid amounts accrue interest at 1.5% per month (or 18% annually) for late payments. This provision makes sure subcontractors are compensated for payment delays.
• Time Limits: The law outlines strict timelines for payments:
• Owners must pay general contractors within 35 days of receiving a payment request.
• General contractors must pay subcontractors within seven days of receiving payment from the owner.
• Right to Suspend Work: If payments are not made within the stipulated time frame, subcontractors may suspend work after providing written notice. This offers substantial protection against not being paid for labor and materials provided.

Understanding and actively using laws like the Texas Prompt Payment Act can provide subcontractors with the tools necessary to safeguard their payments and ensure their business keeps running smoothly.

Practical Tips for Leveraging Prompt Payment Laws

To fully realize the benefits of prompt payment laws, it is important to fit them into your collection strategy. Here are some practical tips to help subcontractors manage their cash flow in line with prompt payment laws:

1. Know Your State’s Law: Familiarize yourself with the prompt payment laws of your state. Each state has its own rules regarding payment terms and penalties, so it is essential to understand the details applicable to where you work. Work with an attorney if additional clarification is needed.
2. Document Everything: Maintain clear, organized documentation for every payment request, invoice, and correspondence. If payment disputes arise, this documentation will serve as critical evidence to support your case.
3. Monitor Payments Closely: Keep a detailed tracking system for payment schedules, due dates, and amounts owed. Staying proactive will allow you to identify and act on delayed payments quickly.
4. Consult Legal Expertise: If payments are delayed or withheld, find an attorney familiar with construction law to help. They can help explain and enforce your rights under prompt payment laws.

Prompt Payment Laws as a Foundation for Financial Stability

For subcontractors, incorporating prompt payment laws into everyday operations is no longer just a best practice—it is a necessity. These laws are powerful tools for preventing financial strain, improving cash flow, and mitigating the risks associated with delayed payments. By leveraging the protections they offer, contractors can operate with greater confidence and stability, even amidst the fluctuations of the construction industry.

About the Author

With more than 18 years of experience in construction and real estate law, Karalynn Cromeens has filed more than a thousand lawsuits to foreclose or remove mechanics liens successfully. Her family also owns a material supply company, providing Karalynn first-hand knowledge of the construction industry. This personal understanding, combined with her extensive legal experience, guides The Cromeens Law Firm’s true purpose— To protect and defend all that you have worked hard for and be your partner in business. She is also a best-selling author and podcast host for Quit Getting Screwed.