In a few short weeks, California will implement a new law that transforms how payment disputes are resolved on private construction projects - are you prepared?
Private construction contracts entered into on or after Jan. 1, 2026, will be subject to Senate Bill 440, also known as the Private Works Change Order Fair Payment Act (the "Fair Payment Act"). See CA Civil Code §§ 8850-8851. With few exceptions, the Fair Payment Act imposes non- waivable rules on the resolution of contractors' claims related to change orders, time extensions, and disputed payments on private projects.
Why Does This Matter?
Historically, there has been a lack of uniformity in how private construction contracts address contractors' payment disputes. As such, those claims have often led to delayed payments and costly litigation. The Fair Payment Act will strengthen contractors' payment protections by imposing strict compliance obligations on owners. An owner's failure to comply with the new requirements can - and likely will - be met with significant late-payment interest, work stoppages, and an increased risk of litigation.
What Is Covered by the Fair Payment Act?
The Fair Payment Act does not govern all payment disputes on a private construction project. Rather, the act applies to contractors' and subcontractors' claims regarding:
- Time extensions, including relief related to delay damages
- Payment for additional work
- Payments disputed by owners
The Fair Payment Act does not apply to residential construction projects that are not mixed-use and exceed four stories. (§ 8850(o).) It is noteworthy that the Act effectively applies California's public works dispute-resolution process under Public Contract Code Section 9204 to private projects.
The New Mandatory Dispute Resolution Process
The goal of the Fair Payment Act is to establish parameters for quickly resolving payment disputes by implementing the following dispute resolution process:
|
EVENT |
ACTION |
TIMING |
RESPONSIBLE PARTY |
|
Contractor Submits Claim |
Claim supported by reasonable documentation & submitted by certified or registered mail |
|
Contractor |
|
Owner Response to Claim |
Owner responds in writing to the claim, identifying approved and disputed portions |
Within 30 days of receiving claim |
Owner |
|
Payment of Undisputed Amounts |
Payment of undisputed portion of the claim |
Within 60 days of Owner issuing written response |
Owner |
|
Meet & Confer |
Parties may meet and confer regarding disputed amount |
If Contractor requests within 30 days of receiving dispute notice |
Contractor |
|
Notice of Remaining Disputed Amount |
If meet and confer is unsuccessful, Owner notifies Contractor of remaining disputed amount |
Within 10 days of meet and confer |
Owner |
|
Mediator |
Parties agree on mediator |
Within 10 days after receiving notice of disputed amount |
Owner & Contractor |
|
Mediation |
Mandatory non-binding mediation |
|
Owner & Contractor |
|
Litigation/ Arbitration |
Only after unsuccessful mediation |
|
Owner & Contractor |
If the owner denies a claim or fails to respond within 30 days, the parties immediately proceed to non-binding mediation. (§ 8850(f).) However, an owner's failure to respond timely does not constitute an adverse finding on the merits of the claim, the responsibility for or the qualifications of the claim. (§ 8850(g)(2).)
The parties can waive the meet-and-confer conference and mediation to proceed directly to litigation or arbitration, as applicable. (§ 8850(m)(2(A).) It is notable that the statute states an owner "shall schedule a meet and confer conference with the claimant within 30 days" which seems to imply the conference must be scheduled and held within 30 days of the contractor requesting such a conference. (§ 8850(e).)
The Enforcement-related Provisions
In addition to providing a dispute resolution process, the Fair Payment Act includes provisions that will motivate project participants to address payment disputes in conformance with the act.
First, interest on unpaid undisputed amounts accrues at 2% per month (24% annually). (§ 8850(h) (1).) In addition, that 2% interest rate applies to disputed amounts that are later deemed due and owing, with interest accruing from the date on which those amounts would have been due had they not been disputed.
Second, if the owner fails to respond timely to a claim, comply with the act, or pay timely an undisputed amount in response to receiving a claim, a contractor or subcontractor can unilaterally suspend work 40 days after submitting a written demand for that payment if, 30 days after submitting that demand, the owner is given a 10-day written notice of intent to stop work. (§ 8850(k).)
Notably, any contract term waiving the above rights is unenforceable. However, the legislature included Section 8850(d)(3), which provides certain practical flexibility by allowing the owner and contractor to mutually agree, in writing, to extend the 30-day claim review period after that claim has been submitted.
The Act Includes Subcontractor Protections
A subcontractor can request that the contractor submit a written claim to the owner on its behalf. The subcontractor must furnish reasonable backup documentation for its claim and cooperate with the contractor during the meet and confer and mediation processes. Additionally, the contractor must act in good faith and may not settle any claim that the subcontractor does not approve in writing.
The contractor has 30 days from receipt of the claim to notify the Subcontractor in writing whether the contractor presented the claim to the owner. If a claim is not presented to the owner, the contractor must explain in writing the reasons for not doing so. However, the Fair Payment Act does not identify the bases that a contractor can rely on when deciding not to submit the subcontractor's claim to the owner.
How to Prepare for This Shift
Savvy contractors and owners can prepare for this new law by revising their contract templates and implementing internal procedures that ensure compliance with the act.
First, revise all relevant contract templates before Jan. 1, 2026. Carefully review the statutory timelines to ensure the revised contract provisions accurately integrate the dispute resolution procedures.
Second, owners and contractors should implement an alert system for claims that is supported by an internal claim-management process. Developing a standardized claim process is crucial in light of the relatively short, stringent time requirements, and it should:
- Ensure all substantive claim requirements are met (e.g., proper issuance via certified or registered mail, including all necessary documentation identifying the reason and method of calculation)
- Calendar response deadlines
- Track Claims and responses
- Establish parameters and decision-making benchmarks for the meet-and-confer conference
Third, prepare staff for the change in the law by educating them on the deadlines for compliance with the new law. In addition to training on the claim requirements and deadlines, setting up templates for documentation standards will be essential. Teams need to be prepared for the meet and confer requirement and trained regarding how to effectively negotiate resolution.
Fourth, implement a pre-construction requirement that (i) the parties identify and agree upon a qualified mediator who can be promptly available to assist in resolving claims and (ii) protocols and parameters be included in contracts regarding who will attend meet and confer conferences and mediations.
Finally, it will be critical to review budgets to ensure cash flow is available to meet the non-extendable 60-day payment deadline for all undisputed sums.
The Fair Payment Act will have a significant impact on how private construction projects proceed when payment- and time-related disputes arise. The more prepared you are for these changes, the more effectively you can utilize the provisions and protect against the adverse impacts of any missteps.
This article was originally published in the Daily Journal.