CONSTRUCTION PAYMENTS ACT; ENACT S.B. 451:
SUMMARY OF INTRODUCED BILL
IN COMMITTEE
Senate Bill 451 (as introduced 6-28-23)
Sponsor: Senator Dan Lauwers
Committee: Labor
Date Completed: 5-15-24
INTRODUCTION
Generally, the "Construction Payments Act" would prescribe requirements for the timeliness
and reliability of payment from an owner to a contractor or from a contractor to a
subcontractor in the construction of private commercial construction projects, such as
apartments or office buildings. The Act would require every contract between such parties to
include clauses that required payment within 30 days of satisfactory performance and that
required interest payments on wrongfully withheld amounts due at a rate of 12% annually.
The Act would not prohibit the withholding of payment for unsatisfactory, incomplete
performance or disputed scope of work under a contract, and it would prescribe non-judicial
and judicial procedures for remedying a withheld payment. The Act would require an owner
to pay a contractor according to the terms of a contract and would establish specific payment
and invoice provisions to be used in cases in which a contract did not contain terms governing
payments or invoices.
FISCAL IMPACT
The bill would have no fiscal impact on the State and an indeterminate fiscal impact on local
courts systems.
It is possible that violations of the bill, which would result in legal action, could necessitate
additional expenditures for a district or civil court. By providing a process for the resolution
of payment disputes for private commercial construction projects, the bill could increase civil
litigation filings for those disputes, most likely in circuit courts. On the other hand, statutory
language outlining a process for resolving disputes can reduce litigation, particularly when
litigation outcomes are predictable. While courts can raise nominal amounts of revenue due
to increased filing fees, increased case filings also add to court administrative costs. Any fiscal
impact on district and circuit courts likely would be minimal.
The bill does not describe any specific fines or penalties to be paid to any State department
by individuals or entities that violate the bill's provisions.
PREVIOUS LEGISLATION
(This section does not provide a comprehensive account of previous legislative efforts on this subject matter.)
The bill is a reintroduction of Senate Bill 1020 from the 2021-2022 Legislative Session. Senate
Bill 1020 received testimony before the Senate Committee on Economic and Small Business
Development but received no further action.
Legislative Analyst: Alex Krabill
Fiscal Analyst: Elizabeth Raczkowski
Michael Siracuse
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CONTENT
The bill would enact the "Construction Payments Act" to do the following:
-- Prescribe provisions that each construction contract awarded by an owner to a
contractor would have to include.
-- Prescribe provisions that each construction contract awarded by a contractor to
a subcontractor or supplier would have to include.
-- Require an owner or contractor to provide notice to a contractor, subcontractor,
or supplier, as applicable, as to why all or a portion of a payment was being
withheld within 10 days after receiving the disputed invoice.
-- Require an owner to pay a contractor strictly in accordance with the terms of the
contract.
-- Prescribe procedures if payment terms were not specified in a contract, including
terms about retainage.
-- Prescribe circumstances under which a provision in a contract for a construction
would be against public policy and would be void and unenforceable.
-- Specify that the Act would apply only to private commercial construction projects
and would not apply to public works contracts and certain residential contracts.
-- Require a court or arbitrator to award damages due equal to the amount that
was determined by the court or arbitrator to have been wrongfully withheld if
arbitration or litigation were commenced to recover payment due and it were
determined that the owner, contractor, or subcontractor had failed to comply
with the payment terms described in the Act.
-- Require a court or arbitrator to award the prevailing party its reasonable
attorney fees, arbitration costs, and expenses for expert witnesses.
Contractor Contracts
The Act would require each construction contract awarded by an owner to a contractor to
include all the following:
-- A payment clause that obligated the owner to pay the contractor for satisfactory
performance under the contract within 30 days after the end of the billing period.
-- A statement that the owner had sufficient funds or financing in place as of the contract's
effective date to complete the scope of work identified in the contract.
-- An interest clause that obligated the owner to pay the contractor interest on wrongfully
withheld amounts due, equal to 12% per annum, on each payment not made in
accordance with the payment clause included in the contract.
"Owner" would mean a person, or its agent, that has an interest in the lands or premises
upon which a contractor has undertaken to erect, construct, complete, alter, or repair any
building or addition to a building, construction project, or development. "Person" would mean
a corporation, partnership, limited liability company, association, or other legal entity or a
natural person. "Construction project" would mean any improvement, renovation, addition,
or development to real property.
"Improvement" or "work" would mean the result of services, labor, or material provided by a
contractor, subcontractor, supplier, or laborer, including surveying, engineering and
architectural planning, construction management, clearing, demolishing, excavating, filling,
building, erecting, constructing, altering, repairing, ornamenting, landscaping, paving; leasing
equipment, prefabricated materials, or components stored on or off site; or installing or
affixing a fixture or material, pursuant to a contract. The term would not include stock material
stored off site. "Contract" would mean a contract, including any and all additions to, deletions
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from, and amendments to the contract, of whatever nature, to provide improvements to real
property.
"Contractor" would include an architect, engineer, general contractor, construction manager,
subcontractor, lower-tiered subcontractors, supplier, or other person, who enters into any
contract with another person to furnish services, labor, or materials in connection with the
erection, construction, completion, alteration, or repair of any building or commercial project
that provides actual improvement to the real property. "General contractor" would mean a
contractor who contracts with an owner or lessee to provide, directly or indirectly, through
contracts with subcontractors, suppliers, or laborers, the improvements to the real property
described in the notice of commencement under the Constructions Lien Act. "Subcontractor"
would mean a person that enters into a contract to furnish labor or materials to a contractor.
"Supplier" would mean a person that enters into a contract with a person to supply materials,
rental equipment, prefabricated materials, or components, which by its use or incorporation
into the project improve the real property. "Laborer" would mean an individual who, pursuant
to a contract with a contractor or subcontractor, provides an improvement to real property
through the individual's personal labor.
"Money" or "funds" would include all money or funds due to a contractor, subcontractor,
supplier, or laborer in connection with a contract for the development, erection, construction,
completion, alteration, or repair of any building or construction project.
"Billing period" would mean the payment cycle agreed to by the parties, or, in the absence of
an agreement, the calendar month within which the work is performed.
The interest would apply to the period beginning on the day after the required date and ending
on the date on which payment of that amount due was made. Any amount of interest that
remained unpaid at the end of any 30-day period would have to be added to the principal
amount of the debt, and thereafter interest penalties would accrue on that amount.
A contract provision could not be construed to impair the right of the owner to include in its
contract provisions that allowed the owner to withhold an amount from payment, which bore
a reasonable relationship to the value of the dispute or claim, of each progress payment
otherwise due to a contractor for unsatisfactory, incomplete performance or disputed scope
of work under the contract without incurring any obligation to incur interest. In that case, the
owner would have to notify the contractor as to why all or a portion of the payment was being
withheld within 10 days of receiving the disputed invoice. If the owner and contractor were
unable to come to an agreement within 30 days after the notice was issued, the owner would
have to deposit the amount of the withheld payment into a verifiable and Federally insured
interest-bearing bank or credit union account created for the project. The contractor would
be entitled to receive verification of the deposit within 10 days after issuing a notice requesting
verification of the deposit to the owner. The deposited money would have to remain in that
account until the owner and contractor resolved their dispute or a court or arbitrator ordered
how the deposited funds were to be disbursed.
"Court" would mean the district or circuit court of Michigan subject to the venue and
jurisdictional requirements of each court.
If it were determined by a court of competent jurisdiction or arbitrator that a withheld
payment was not withheld in good faith for reasonable cause, the court or arbitrator would
have to award reasonable attorney fees to the prevailing party. In a civil action or arbitration
brought under the Act, if a court or arbitrator determined after a hearing that the case was
initiated, a defense was asserted, a motion was filed, or any proceeding in that matter was
done frivolously or in bad faith, the court or arbitrator would have to require the party that
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engaged in that activity to pay the other party named in the action the amount of the costs
attributable to those actions and reasonable expenses incurred by that party, including
reasonable attorney fees.
Once an owner had made payment to the contractor according to the payment terms of the
construction contract or the Act's provisions, future claims for the withheld payment against
the owner by the contractor would be barred.
Subcontractor & Supplier Contracts
Under the Act, each construction contract awarded by a contractor to a subcontractor or
supplier would have to include all the following:
-- A payment clause that obligated the contractor to pay the subcontractor and each supplier
for satisfactory performance under the subcontract within seven calendar days out of the
amount paid to the contractor.
-- An interest clause that obligated the contractor to pay the subcontractor or supplier
interest on wrongfully withheld amounts due, equal to 12% per annum, on each payment
not made in accordance with the payment clause included in the contract.
The interest would apply to the period beginning on the day after the required date and ending
on the date on which payment of that amount due was made. Any amount of interest that
remained unpaid at the end of any 30-day period would have to be added to the principal
amount of the debt, and thereafter interest penalties would accrue on that amount.
A contract provision described above could not be construed to impair the right of the
contractor to include in its contract provisions that permit the contractor to withhold an
amount from payment, which bore a reasonable relationship to the value of the dispute or
claim, of each progress payment otherwise due to a subcontractor or supplier for
unsatisfactory performance, delays, or a dispute regarding the scope of work under the
contract without incurring any obligation to incur interest. In that case, the contractor would
have to notify the subcontractor or supplier as to why all or a portion of the payment was
being withheld within 10 days after receiving a disputed invoice. If the contractor,
subcontractor, or supplier were unable to come to an agreement within 30 days after the
notice was issued, the contractor would have to deposit the amount of the withheld payment
into a verifiable and Federally insured interest-bearing bank or credit union account created
for the subject project. The subcontractor or supplier would be entitled to receive verification
of the deposit within 10 days after issuing a notice to the contractor requesting verification of
the deposit by the contractor. The deposited money would have to remain in that account
until the contractor and subcontractor or supplier resolved their dispute, or a court or
arbitrator ordered how the deposited funds were to be disbursed.
If it were determined by a court of competent jurisdiction or arbitrator that a withheld
payment was not withheld in good faith for reasonable cause, the court or arbitrator would
have to award reasonable attorney fees to the prevailing party. In any civil action or
arbitration brought under the Act, if a court or arbitrator determined after a hearing that the
cause was initiated, a defense was asserted, a motion was filed, or any proceeding in that
matter was done frivolously or in bad faith, the court or arbitrator would have to require the
party that engaged in that activity to pay the other party named in the action the amount of
the costs attributable to those actions and reasonable expenses incurred by the party,
including reasonable attorney fees.
Once a contractor had made payment to the subcontractor or supplier according to the
payment terms of the construction contract or the Act's provisions, future claims for the
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withheld payment against the contractor or any surety of the contractor from the
subcontractor or supplier on the subject project would be barred.
Retainage
"Retainage" would mean the percentage withheld from a progress payment.
Retainage by an owner would be limited as follows:
-- Not more that 10% of the total construction contract amount if less than 50% of the work
had been completed.
-- Zero percent of the total construction contract amount if 50% or more of the work had
been completed.
An owner would have to release the retainage as described above together with final payment.
Retainage by a general contractor, a construction manager, a prime contractor, a supplier, or
a subcontractor or their agents, or by a contractor against a lower-tiered contractor, would
be limited as follows:
-- Not more that 10% of the total construction contract amount if less than 50% of the work
had been completed.
-- Zero percent of the total construction contract amount if 50% or more of the work had
been completed.
Retainage as described above would have to be released together with final payment.
Payment Terms
The Act would require an owner to pay the contractor strictly in accordance with the terms of
the contract. If the terms of the contract did not contain a term governing payment, the
contractor could submit an invoice to the owner for payments at the end of the billing period
for one or both of the following:
-- Work already commenced but not fully completed if the invoiced work were completed by
the end of the billing period.
-- Materials already supplied to the project.
If the contract between the owner and a contractor did not contain a provision governing
when invoices could be submitted, a contractor could submit a partial invoice every 30 days
for payment for work performed or a final invoice when the agreed-upon work was fully
completed. The owner would have to pay all undisputed amounts owed to the contractor
within 30 days after the end of the billing period or 30 days after delivery of the invoice by
the contractor, whichever was later. These provisions would prohibit an owner from retaining
a specified percentage of each progress payment and final payment that was due to a
contractor, subcontractor, and supplier to ensure satisfactory performance under the contract.
If payment terms were not specified in the contract between the general contractor and a
subcontractor or supplier, a general contractor would have to pay all undisputed amounts
owed to its subcontractors, suppliers, or materialmen within seven days after receiving
payment for the subcontractor's work or supplier's materials by the general contractor.
If payment terms were not specified in the contract between the subcontractor and its
subcontractors or suppliers, a subcontractor would have to pay all undisputed amounts owed
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to its subcontractors, suppliers, or materialmen within seven days after receiving payment
for the subcontractors' work or suppliers' materials by the subcontractor.
If an owner or contractor disputed any amounts stated in an invoice for payment, then all of
the following would apply:
-- The party disputing the invoice would have to notify the other party in writing within 10
days after receiving the disputed invoice.
-- The party disputing the invoice would have to, in the written notice of dispute, specifically
describe in detail the items within the invoice that were disputed.
-- If the written notice of dispute were not given within the required 10-day period, the
invoice would be considered accepted as submitted.
-- If the written notice of dispute were not given