Construction Law Blog

After years of discussion and aggressive lobbying from all sides, the Virginia General Assembly, at its April 27th veto session, approved Governor Youngkin’s tweaks to two amended and re-enacted Virginia statutes relating to the right of lower-tier subcontractors to receive payment for work properly performed on both public and private Virginia construction projects.

Going into the 2022 Session, there were concerns in multiple camps that amendments to Virginia’s construction contract payment-clause statutes might sound a death-knell for the continued existence in Virginia construction contracts of the well-known “pay-when-paid” (sometimes known as “pay-if-paid”) principle in prime contracts as well as subcontracts.

After studying the final text of the two payment statutes approved by the General Assembly and as revised by the governor (one statute governing state and local government contracts and the other statute applicable to private construction contracts), we believe that, while traditional “pay-if-paid” provisions are no longer enforceable in Virginia construction contracts, general contractors and subcontractors (and their lawyers) may still be able to find a way in which to pay lower-tier subcontractors who have performed their work properly, while withholding payment from lower-tier subs who have not.

Public Contracts:  On the public contract side, Virginia Code Section 2.2-4354 has been amended to state that all contracts awarded by the state or any local government must provide for the following:

• A payment provision that requires general contractors to pay all amounts owed to any subcontractor, except that GC’s may withhold amounts related to a sub’s non- or defective performance.
• If a general contractor withholds any amount from a subcontractor, the GC must notify the sub in writing of the GC’s intention to hold back payment, with the reason for non-payment.
• Payment by the state or local government to the GC cannot be a condition precedent to payment to any lower-tier subcontractor (and any such “condition precedent” language is now unenforceable in state contracts), although as noted above non-performance by the sub is a legitimate basis for withholding payment.

In addition, all state and local government contracts must require the general contractor to take one of two actions within seven (7) days of receiving payment from the public body: (i) pay subcontractors their proportionate share of the total payment received from the public body; or (ii) notify the subcontractor, and the public body, in writing of the GC’s intention to withhold money from the sub, with the reason for non-payment.

Private Contracts: On the private contract side, Virginia Code Section 11-4.6[1] has been amended to require that all private construction contracts between owners and general contractors provide for the following:

• Private owners must pay general contractors within sixty (60) days of receiving a pay app for satisfactorily completed work.
• Owners are not obligated to pay for non-compliant or incomplete work.
• If an owner withholds payment, the owner must notify the general contractor in writing and with “reasonable specificity” of the owner’s intention to withhold payment and the reason for nonpayment.

Likewise, under new Code Section 11-4.6, all subcontracts and other lower-tier subcontracts on private jobs must provide for the following:

• General contractors must pay subcontractors within (i) sixty (60) days of satisfactory completion of a sub’s work for which the subcontractor has billed, or (ii) within seven (7) days after receipt by the GC of payment by the owner for the work of that subcontractor.
• General contractors are not obligated to pay for defective, non-compliant, or incomplete work.
• If a general contractor withholds payment, the GC must notify the subcontractor in writing of the GC’s intention to hold back money, with the reason for nonpayment, including the specific breach of contract being claimed, the dollar amount being held back, and the lower-tier sub responsible for the breach.
• Payment by the owner to the GC cannot be a condition precedent to payment to any lower-tier subcontractor, unless the owner is insolvent or bankrupt. And as noted above non-performance by the sub continues to be a legitimate basis for withholding payment.
• The above rules are also applicable to contracts between subcontractors and lower-tier subcontractors.

So, the traditional, tried-and true “pay-when-paid” contract provision is no longer enforceable in Virginia public and private construction contracts. But if the original primary purpose of “pay-when-paid” was to shift the risk of owner-insolvency from general contractors to lower-tier subcontractors, that purpose remains. In all cases outside of owner-insolvency, subs that properly performed their work will no longer bear the risk of owner-withholding or owner-GC disputes.   

Importantly, all of these new rules apply only to public and private construction contracts entered into on or after January 1, 2023. But between now and the first of the year, Virginia construction professionals need to adjust their thinking, and their contracts, to meet the requirements of the new law. The lawyers of Hirschler’s Construction Practice Team stand ready to answer your questions and discuss any of these new rules.

A link to Senate Bill No. 550, which contains all of the new statutory amendments, can be found here.

[1] (Section 11-4.6 was also amended to ensure that the joint and several liability of contractors for the unpaid wages of their subcontractors was extended to all lower-tier subcontractors. That revision will have important ramifications that the Hirschler construction law team will address in upcoming blog posts).