More Details about VA Changes to Newly Enacted Ban on Contingent Payment Provisions

In April, we wrote about Virginia Senate Bill (SB) 550, which sought to amend VA ST §§ 2.2-4354 and 11-4.6 to prohibit the use of contingent payment provisions in public and private construction projects. Since then, SB 550 was formally enacted and signed into law on April 27, 2022. We observed that it was still unclear as to whether this law applied retroactively or not, but also that Governor Glenn Youngkin sent a proposed amendment of the bill back to the legislature on April 11, 2022, stating that the bill "shall apply to construction contracts executed on or after January 1, 2023." This revision was accepted, along with these other revisions that the governor made:

1. SB 550 previously contained 45-day deadlines on private projects for the owner to pay a general contractor or a higher-tiered contractor to pay a lower-tiered subcontractor, but Governor Younkin's amendment lengthened these deadlines to 60 days.
2. There was initial concern regarding the practicality of certain formal requirements of notice for withholding funds in private contracts. The prior drafts of SB 550 stated that if an owner withheld funds from a contractor, the owner must specifically identify "the contractual noncompliance, the payment amount being withheld, and the lower-tier subcontractor responsible for the contractual noncompliance." The governor revised that language to state more broadly that the notice must be "in writing and with reasonable specificity." By relaxing the notice requirement, the revised language is more workable for owners withholding funds. However, general contractors still must go through those more formal steps in order to withhold all or a part of an amount invoiced by their subcontractor.
3. SB 550 originally specified that, for public and private contracts, the contractor or higher-tiered contractor was to be individually liable for the amounts owed to the subcontractor or lower-tiered subcontractor, respectively. Governor Younkin removed the word "individually" from the provisions to address concerns that this law may require individual liability beyond the contractor or subcontractor entities.
4. The governor added the following sentence to the sections covering private projects: "Nothing in this subsection shall be construed to apply to or prohibit the inclusion of any retainage provisions in a construction contract." This eased concerns about the ambiguity of whether or not retainage would be affected by the new law.

With the new law coming into effect on January 1, 2023, contractors and subcontractors should start looking at their contracts, making necessary revisions and understanding how those revisions affect their operations.

-Jackson S. Nichols, partner, and Nicholas F. Morello, associate, Cohen Seglias Pallas Greenhall & Furman PC