How Do Virginia’s Contractor Payment Rules Affect Cash Flow and Financial Reporting?

Understanding Pay-if-Paid and Pay-when-Paid Clauses

Contractor and subcontractor relationships are fundamental to the construction industry, but the payment terms included in construction contracts can have significant legal, accounting, and cash flow implications. Virginia contractors should understand these requirements and maintain financial processes that support timely payments, accurate recordkeeping, and compliance.

Virginia Senate Bill 550 changed how certain payment provisions operate in construction contracts executed on or after January 1, 2023. While construction attorneys should evaluate contract language and legal compliance, contractors should also work with their accounting advisors to understand how these requirements may affect working capital, project accounting, and internal controls.

Historically, construction contracts commonly included one of two provisions governing subcontractor payments:

• A pay-if-paid provision generally made the contractor’s receipt of payment from the owner a condition that had to occur before the subcontractor was entitled to payment.
• A pay-when-paid provision generally addressed the timing of payment rather than eliminating the contractor’s underlying obligation to pay the subcontractor.

How Virginia’s Rules Changed Contractor Payments

The distinction between these two clauses became increasingly important in Virginia following the legislation, which generally makes contract provisions that condition subcontractor payment on the contractor’s receipt of payment unenforceable.

Contractors ordinarily remain responsible for paying subcontractors for satisfactory performance, even when the owner has not yet paid the contractor. A limited exception may apply when the party responsible for paying the contractor is insolvent or a debtor in bankruptcy.

For private construction projects, contractors generally must pay subcontractors by the earlier of:

• 60 days after receiving an invoice following satisfactory completion of the invoiced work; or
• Seven days after receiving payment attributable to the subcontractor’s work.

If a contractor withholds all or part of a subcontractor’s invoice because of contractual noncompliance, the contractor generally must provide written notice within 50 days after receiving the invoice. The notice must identify the contractual issue, the amount being withheld, and the subcontractor responsible for the noncompliance.

Private project owners are generally required to pay contractors within 60 days after receiving an invoice following satisfactory completion of the invoiced work. If an owner withholds payment, written notice generally must be provided to the contractor within 45 days.

Payment requirements also apply to public construction contracts, although the specific contract provisions and notice procedures differ. Contractors performing public work should review the requirements under the Virginia Public Procurement Act separately.

Why These Rules Matter to a Contractor’s Financial Operations

While Virginia law addresses a contractor’s payment obligations and timing, it also raises broader business and financial reporting considerations. Contractors may wonder how these requirements affect cash flow forecasting, project accounting, subcontractor payables, and ultimately their financial statements. Perhaps most importantly, can a contractor remove a liability from its balance sheet simply because payment has not been received from the project owner? This answer is not just governed by the contract alone. Generally accepted accounting principles (GAAP) will also play a critical role in evaluating and answering these questions.

Construction businesses should consider how the payment rules may affect:

Financial reporting: Contractors operating under paid-if-paid arrangements may be tempted to write off amounts owed to subcontractors when collection from the project owner becomes unlikely. However, the existence of an uncollectible receivable does not automatically eliminate the related payable obligation under GAAP. Under ASC 405-20, a liability generally remains with the contractor until it has been settled, legally released, or the contractor is otherwise discharged from being the primary obligor.

Cash flow forecasting: Contractors may need sufficient liquidity to pay subcontractors during periods when owner payments are delayed.

Project accounting: Accounting systems should accurately track invoice receipt dates, completion approvals, owner payments, subcontractor obligations, retainage, and disputed amounts.

Accounts payable procedures: Payment workflows should identify the earlier of the applicable 60-day or seven-day deadline and alert accounting personnel before it passes.

Accounts receivable management: Timely billing, accurate documentation, and active collection efforts become increasingly important when subcontractor payment obligations are not dependent on owner payment.

Contractor borrowing needs: Businesses may need to re-evaluate lines of credit and other working capital resources to address temporary funding gaps.

Internal controls: Project management and accounting teams should have clear procedures for approving completed work, documenting contractual noncompliance, and communicating withheld payments.

Failure to make timely payments may also result in interest penalties, adding to project costs and potentially affecting subcontractor relationships. The law does not prohibit properly structured retainage provisions.

Steps Virginia Contractors Should Consider

Contractors that have not recently evaluated their payment practices should consider the following:

1. Review construction contracts. Ask legal counsel to evaluate contracts executed on or after January 1, 2023, including owner agreements, subcontracts, and applicable lower-tier agreements.
2. Evaluate cash flow exposure. Model the effect of paying subcontractors before receiving payment from owners, particularly on large or slow-paying projects.
3. Strengthen invoice tracking. Record when invoices are received, when work is satisfactorily completed, when owner payments arrive, and when statutory payment deadlines occur.
4. Establish withholding procedures. Coordinate with legal counsel to develop a consistent process for documenting noncompliant work and issuing timely written notices.
5. Review financing capacity. Determine whether available cash reserves and credit facilities are sufficient to manage potential payment timing differences.
6. Train project and accounting teams. Confirm that employees responsible for financial reporting, contract administration, billing, collections, and accounts payable understand their roles and deadlines.

Aligning Compliance with Financial Planning

Virginia’s contractor payment requirements can influence working capital, project profitability, borrowing needs, and day-to-day accounting procedures. Legal counsel can help contractors determine whether their agreements comply with Virginia law, while an accounting advisor can evaluate the financial and operational effects and help strengthen the systems used to monitor payments.

Keiter’s construction professionals can help contractors assess cash flow exposure, improve project accounting processes, evaluate internal controls, and plan for the working capital demands created by payment timing differences.

Questions on this topic? Contact your Keiter Opportunity Advisor | Email | Call: 804.747.0000.