5.2 Tennessee Prompt Pay Act of 1991

Tennessee Prompt Pay Act of 1991 (TCA Title 66, Chapter 34)

Cash flow is the lifeblood of the construction industry. Recognizing that delayed payments can force solvent contractors into bankruptcy, the Tennessee General Assembly enacted the Tennessee Prompt Pay Act of 1991 (codified in Tennessee Code Annotated Title 66, Chapter 34). This statutory framework establishes mandatory payment deadlines, interest penalties for delinquent accounts, and statutory rights to suspend performance across all construction tiers in Tennessee.

1. Statutory Purpose and Scope of TCA 66-34

The Tennessee Prompt Pay Act applies to both private real property improvements and public construction projects (including state, county, and municipal contracts), unless specifically exempted. The statute enforces strict timing standards to ensure that funds flow downstream efficiently from project owners to prime contractors, subcontractors, sub-subcontractors, and material suppliers.

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2. Statutory Payment Deadlines Across Project Tiers

The Prompt Pay Act mandates specific payment windows at each structural level of a construction project. The statutory clock begins ticking upon the occurrence of explicit payment triggers.

Owner Payment Obligations — Private (TCA 66-34-202)

When a prime contractor performs in accordance with the written contract and timely submits an application for payment, the owner must pay the full amount earned (less only permissible withholdings under TCA 66-34-203) within 30 calendar days after the pay application is submitted. Failure of the owner's architect or engineer to review or approve the application does not excuse the owner from paying. On public projects, the public owner must pay the prime contractor within 45 days after receiving a proper invoice unless the contract provides otherwise (TCA 12-4-703).

Prime Contractor Payment Obligations (TCA 66-34-302 / 66-34-401)

On private projects, the prime contractor must pay each remote contractor the full amount earned within 30 calendar days after the remote contractor timely submits its application for payment under the subcontract schedule (TCA 66-34-302(a)). Unlike many states, Tennessee's private prompt-pay timing for subs is not tied to when the prime receives owner funds — the 30-day clock runs from the remote's own pay application. On public projects, the prime contractor must pay subcontractors within 30 days after receiving the corresponding payment from the public owner (TCA 12-4-707). A prime contractor cannot retain downstream funds due to a subcontractor for work that the owner has already paid for, unless a legitimate, documented good-faith dispute exists regarding defective work.

Lower-Tier Payment Obligations (TCA 66-34-401)

The statutory 30-day rule continues down the contractual chain on private projects. Remote contractors who receive payment must pay their lower-tier remotes and material suppliers within 30 calendar days after the lower-tier party's timely pay application is submitted, subject to any enforceable pay-if-paid condition precedent in the written contract.

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3. Statutory Interest Penalties (TCA 66-34-601)

To deter late payments, the Prompt Pay Act imposes a mandatory interest penalty on delinquent balances under TCA 66-34-601.

• Statutory Rate: Any payment not made in accordance with the chapter accrues interest at 1.5% per month (an annualized rate of 18% per annum).
• Contractual Exception: If the written contract specifies a rate for delinquent payments, that contract rate applies instead; if no rate is specified, the statutory 1.5% monthly rate governs.
• Accrual Mechanics: Interest accrues from the date the payment becomes due until the date paid — i.e., beginning the day after the applicable 30-day (private) or 45-day (public) window expires.

Worked Interest Calculation Scenario

Assume a prime contractor on a private project submits a timely monthly pay application for $200,000 on March 1st. Under TCA 66-34-202(a), the owner must pay within 30 days, making the statutory due date March 31st. The owner fails to issue payment until April 30th (30 days past the due date).

$\text{Monthly Interest Rate} = 1.5\% = 0.015$ $\text{Statutory Interest Penalty} = \$200{,}000 \times 1.5\% \times \left(\frac{30 \text{ late days}}{30 \text{ days/month}}\right) = \$3{,}000$

The owner owes the prime contractor the principal balance of $200,000 plus a statutory interest penalty of $3,000, for a total payment of $203,000.

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4. Statutory Right to Stop Work & Notice Procedures (TCA 66-34-602)

When an owner or contractor defaults on statutory payment obligations, the Prompt Pay Act provides the unpaid party with a powerful statutory self-help remedy: the legal right to suspend performance without breaching the contract.

Mandatory Written Notice Requirements

To exercise the statutory right to stop work under TCA 66-34-602, the unpaid contractor or subcontractor must comply strictly with formal notice procedures:

1. Written Demand: The unpaid party must send a formal written notice of intent to stop work to the non-paying party.
2. Service Method: The notice must be sent by registered or certified mail, return receipt requested. Service by regular mail, verbal statement, or simple email does not fulfill statutory requirements.
3. 10-Day Statutory Cure Period: The notice must explicitly state that work will be suspended if full payment (including statutory interest) is not received within 10 calendar days from the non-paying party's receipt of the notice.

Protection Against Contract Breach

If the 10-day cure period expires without payment, the contractor or subcontractor may immediately suspend work. Under TCA 66-34-602, suspending work under these statutory conditions does not constitute a breach of contract, and the non-paying owner or contractor cannot assess delay damages, default claims, or liquidated damages against the suspending party. Furthermore, the contract completion date is extended by the number of days performance was suspended once payment is cured and work resumes.

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5. Non-Waivability & Contractual Protections (TCA 66-34-701)

The statutory protections of the Tennessee Prompt Pay Act cannot be contracted away. Under TCA 66-34-701, any provision in a construction agreement that attempts to waive, modify, or restrict the rights, deadlines, or interest penalties guaranteed by the Prompt Pay Act is void and unenforceable as against public policy.

"Pay-When-Paid" vs. "Pay-If-Paid" Clauses

Tennessee courts carefully distinguish between conditional payment clauses:

• Pay-When-Paid Clauses: Treated as timing mechanisms governing when payment is due. They do not relieve a prime contractor of the ultimate obligation to pay a subcontractor within a reasonable time, even if the owner defaults.
• Pay-If-Paid Clauses: Seek to transfer the risk of owner insolvency entirely to the subcontractor by making owner payment an absolute condition precedent to contractor payment. While Tennessee permits express pay-if-paid clauses if phrased in clear, unequivocal language, such clauses cannot override the statutory retainage escrow requirements or prompt pay notice rights mandated by TCA Title 66, Chapter 34.