HBA-DMD C.S.H.B. 1522 76(R)BILL ANALYSIS Office of House Bill AnalysisC.S.H.B. 1522 By: Siebert Business & Industry 3/27/1999 Committee Report (Substituted) BACKGROUND AND PURPOSE Contractors, subcontractors, and suppliers of construction companies often complain that they have not been paid for work already performed. Typically, the reason for nonpayment is not defective or incomplete work. Rather, it is due to the general contractor not receiving payment from the owner. After receiving the initial payment from the owner, the general contractor pays the contractors, subcontractors, and suppliers. However, in the event that payment is not received, the subcontractors, who may be responsible for more than 80 percent of the work, are still required to pay for labor and materials even if payment has not been received from the general contractor, which can force the subcontractor to borrow from a lender in order to pay workers and suppliers. C.S.H.B. 1522 seeks to increase the cash flow on construction projects by requiring monthly billings and authorizes contractors or subcontractors to withhold work performance if they have not yet been paid 10 days after notifying the owner or contractor of such. This bill requires the owner to pay the contractors or subcontractors the amount requested within five days after receiving loan proceeds if the loan was not received within 30 days after the contractor's request for payment. This bill also authorizes contractors or subcontractors to begin legal proceedings to recover the payment 10 days after giving written notice concerning the intent to seek legal action. This bill requires a vendor or subcontractor to submit to a governmental entity monthly invoices for goods and services that were provided. RULEMAKING AUTHORITY It is the opinion of the Office of House Bill Analysis that this bill does not expressly delegate any additional rulemaking authority to a state officer, department, agency, or institution. SECTION BY SECTION ANALYSIS SECTION 1. Amends Section 28.002, Property Code, as follows: Sec. 28.002. PROMPT PAY REQUIRED. (a) Requires a contractor to submit invoices to the owner at least monthly for goods or services that were provided for the owner including those goods and services that were provided to the contractor by a subcontractor. Requires a subcontractor to submit invoices to the contractor at least monthly for goods or services provided to the subcontractor by another subcontractor. Sets forth that this subsection does not apply to a contractor or subcontractor providing goods or services for an owner under a contract for construction of or improvements to a detached single-family residence, duplex, triplex, or quadruplex. Redesignates existing Subsections (a)-(c) to Subsections (b)-(d), respectively. (b) Requires an owner to pay for the amount allowed under the contract for specially fabricated materials minus any amount that is authorized by statute to be withheld, rather than statutory offsets, no later than 35, rather than 45, days after the owner or person authorized to act on behalf of the owner receives the request. (c) Requires a contractor to pay a subcontractor a portion of the owner's payment that is attributable for work that is properly performed or specially fabricated as provided under the contract, rather than if payment for stored materials is provided for in the contract. Makes conforming changes. (d) Makes conforming changes. SECTION 2. Amends Section 28.003, Property Code, as follows: (a) Authorizes the owner, contractor, or subcontractor, if a good faith dispute exists concerning the amount owed for a payment request or required under a contract for construction of or improvements to a detached single-family residence, duplex, triplex, or quadruplex, to withhold from the payment owed not more than 110 percent of the difference between what the obligee claims is due and what the obligor claims is due. Makes a nonsubstantive change. (b) Authorizes the owner, contractor, or subcontractor, if a good faith dispute exists concerning the amount owed for a payment request or required under a contract for construction of or improvements to real property, excluding a detached single-family residence, duplex, triplex, or quadruplex, to withhold from the payment owed not more than 100 percent of the difference between what the obligee claims is due and what the obligor claims is due. Sets forth that a good faith dispute includes a dispute regarding whether the work was performed in a proper manner. SECTION 3. Amends Section 28.006(b), Property Code, to make conforming changes. SECTION 4. Amends Section 28.008, Property Code, to require the date of payment required of the owner under Section 28.002(b), rather than 28.002(a), to be changed from 35, rather than 45, days after receiving the payment request to the fifth, rather than 5th, day after the owner receives loan proceeds in the event that the lender is legally obligated to disburse such proceeds to the owner, but has failed to do so within 35, rather than 45, days after the owner has received the contractor's payment request. SECTION 5. Amends Chapter 28, Property Code, by adding Sections 28.009 and 28.010, as follows: Sec. 28.009. RIGHT TO SUSPEND WORK. (a) Authorizes a contractor or any subcontractor, if an owner fails to pay the contractor the undisputed amount within the time limits provided by this chapter, to suspend the contractually required performance 10 days after the contractor or subcontractor gives the owner and the owner's lender written notice informing the owner that payment has not been received and stating the intent of the contractor or subcontractor to suspend performance for nonpayment. (b) Provides that for the purposes of Subsection (a), the contractor or subcontractor must give the owner's lender the written notice only in certain circumstances. (c) Sets forth that a contractor or any subcontractor who suspends performance is not required to supply further labor, services, or materials until the person is paid the amount provided by this chapter, plus costs for demobilization and remobilization or is not responsible for damages resulting from the work stoppage if the contractor or subcontractor has not been notified in writing before the work stoppage that payment has been made or that a good faith dispute for payment exists. (d) Provides that a notification that a good faith dispute for payment exists provided under Subsection (b) must include a list of specific reasons for nonpayment. Entitles the subcontractor, if a specified reason for nonpayment includes labor, services, or materials that were provided by a subcontractor that are not provided in compliance with the contract, to a reasonable opportunity to cure the listed items or offer a reasonable amount to compensate for listed items that cannot be promptly cured. (e) Sets forth that this section does not apply to a contract for the construction of or improvements to a detached single-family residence, duplex, triplex, or quadruplex, or a contract to improve real property for a governmental entity. (f) Establishes that the rights and remedies provided by this section are in addition to rights and remedies provided by this chapter or other law. Sec. 28.010. DIRECT CAUSE OF ACTION AGAINST OWNER. (a) Entitles the contractor or subcontractor to a direct cause of action against the owner, if an owner fails to pay the contractor the undisputed amount within the time limits provided by this chapter, to recover payment for labor, services, or materials provided under the contract, and all reasonable damages, including the reasonable cost of demobilization. (b) Authorizes a contractor or subcontractor to bring a direct cause of action against the owner under this section beginning 10 days after the contractor or subcontractor gives the owner written notice that the contractor or subcontractor intends to exercise the rights and remedies provided by this section. (c) Authorizes an owner to offset the payment, in a direct action brought under this section, that is required for damages for labor, services, or materials provided by the contractor that do not comply with the contract requirements. (d) Establishes that an agreement by a contractor to indemnify or defend the owner is unenforceable only to the extent that it applies to a direct cause of action by a subcontractor under this section. Establishes that an agreement by a subcontractor to indemnify or defend the owner, contractor, or another subcontractor is unenforceable only to the extent that it applies to a direct cause of action by a subcontractor under this section. (e) Sets forth that this section does not apply to a contract for the construction of or improvements to a detached single-family residence, duplex, triplex, or quadruplex; or a contract to improve real property for a governmental entity. (f) Sets forth that this section does not affect the requirements for perfecting or enforcing a lien under Chapter 53 (Mechanic's, Contractor's, or Materialman's Lien), Government Code. (g) Establishes that the rights and remedies provided by this section are in addition to rights and remedies provided by this chapter or other law. SECTION 6. Amends Subchapter A, Chapter 2251, Government Code, by adding Sections 2251.004 and 2251.005, as follows: Sec. 2251.004. WAIVER PROHIBITED. Prohibits the provisions of this chapter from being waived by contract or otherwise. Sec. 2251.005. TIME FOR SUBMITTING INVOICES UNDER CERTAIN CONTRACTS. (a) Sets forth that this section applies only to the submission of invoices under a contract with a governmental entity to improve real property or to perform construction or maintenance services. (b) Requires a vendor to submit invoices to the governmental entity periodically, but no less than monthly, for all goods and services provided by or through the vendor for the governmental entity, including those goods and services provided to the vendor by a subcontractor. (c) Requires a subcontractor to submit invoices to the vendor periodically, but no less often monthly, for all goods and services provided by or through the subcontractor for the vendor, including those goods and services provided to the subcontractor by another subcontractor. SECTION 7.Effective date: September 1, 1999. Makes application of this Act prospective to a contract or agreement involving work performed on real property by a contractor or subcontractor. SECTION 8.Emergency clause. COMPARISON OF ORIGINAL TO SUBSTITUTE C.S.H.B. 1522 differs from the original bill in SECTION 1 (Section 28.002, Property Code) by modifying proposed Subsection (a) to provide that Subsection (a) does not apply to a contractor or subcontractor providing goods or services for an owner under a contract for construction of or improvements to a detached single-family residence, duplex, triplex, or quadruplex. In addition, the substitute modifies proposed Subsection (b) to change the time period from 30 to 35 days after an owner receives a payment request that the owner is required to pay for the amount allowed under the contract for specially fabricated materials minus any amount that is authorized by statute to be withheld. C.S.H.B. 1522 differs from the original bill in SECTION 2 (Section 28.003, Property Code) by creating Subsection (a), which authorizes the owner, contractor, or subcontractor, if a good faith dispute exists concerning the amount owed for a payment request or required under a contract for construction of or improvements to a detached single-family residence, duplex, triplex, or quadruplex, to withhold from the payment owed not more than 110, rather than 100, percent of the difference between what the obligee claims is due and what the obligor claims is due. Additionally, the substitute adds new Subsection (b) to authorize the owner, contractor, or subcontractor, if a good faith dispute exists concerning the amount owed for a payment request or required under a contract for construction of or improvements to real property, excluding a detached single-family residence, duplex, triplex, or quadruplex, to withhold from the payment owed not more than 100 percent of the difference between what the obligee claims is due and what the obligor claims is due. Sets forth that a good faith dispute includes a dispute regarding whether the work was performed in a proper manner. In SECTION 4 of the bill, the substitute makes a conforming change. C.S.H.B. 1522 differs from the original bill in SECTION 5 (Section 28.009, Property Code) by changing proposed Subsection (a) to include the owner's lender as a person who must be provided written notice before a contractor or subcontractor is authorized to suspend work due to nonpayment. Additionally, this substitute adds new Subsection (b) to set forth that the contractor or subcontractor must give the owner's lender the written notice only in certain circumstances. In SECTION 5 (Sections 28.009 and 28.010, Property Code) the substitute adds a new Subsection (e) to set forth certain provisions for which these sections do not apply. Also in SECTION 5, Subsections 28.009(b), (c), and (d), Property Code, in the original are redesignated as Sections 28.009(c), (d), and (f), Property Code. In SECTION 5, Subsection 28.010(e), Property Code, in the original is redesignated as 28.010(g), Property Code in the substitute.