Unless a contractor wants to finance public construction projects, a contractor on a State project wants to collect interest on any late payments the State of South Carolina owes. South Carolina’s Prompt Payment Act permits contractors to recover interest on such late payments, but a recent decision shows contractors must carefully comply with the statute’s notice requirement to preserve this right.

In Consensus Construction & Consulting, Inc. v. Horry-Georgetown Technical College, the Chief Procurement Officer for Construction (“CPOC”) found the State wrongfully withheld payment from a contractor and then turned to the issue of whether the contractor was entitled to recover interest on the payment owed.  The State’s Standard Contract Modifications and Standard Supplementary Conditions replace the interest provisions in standard form contracts with a provision limiting the recovery of interest to only those situations where the State must pay interest under the Prompt Payment Act.  The CPOC held that the Prompt Payment Act applies to the State, but the contractor was not entitled to interest because of the Act’s notice requirement which provides:  “no interest is due unless the person being charged interest has been notified of the provisions of this section at the time the request for payment is made.”  S.C. Code Ann. § 29-6-50.

The CPOC found the contractor was not entitled to interest because it did not give the State notice of the Act. In reaching that conclusion, the CPOC reviewed the contractor’s pay applications, letters notifying the State that payment was late, and letters demanding payment, and found that none of these items provided notice of the Act’s interest provision.  By considering these three different categories of correspondence, the CPOC left unresolved the issue of exactly when notice is provided “at the time the request for payment is made.”  Is it when a pay application is submitted, when the State first receives notice that payment is late, when a demand is made, or some other time?

The “take-home message” from the Consensus Construction decision for contractors on State projects is that to be safe, contractors should include an explicit notice in or with all payment applications to the State that if payment is late, interest will be due under the Prompt Payment Act, specifically Section 29-6-50 of the South Carolina Code.  If a payment is late, the contractor should also mention in all further communications the State’s obligation to pay interest under Section 29-6-50.  If a contractor does not take the simple step of including a notice and a late payment does occur, the contractor is foregoing an extra 1% each month in interest due to a missing sentence in a payment application.

Contractors should also keep the lesson from Consensus Construction in mind on private projects and include notice in pay applications there as well.  However, there contractors have some additional protections in the form of Section 27-1-15 of the South Carolina Code, which obligates the payment of interest from the date of a demand in certain circumstances, but which the Consensus Construction decision found does not apply to the State.

Finally, the Consensus Construction decision also dealt with a separate but related issue of whether a contractor can recover attorney’s fees from the State in a contract dispute.  The CPOC acknowledged that Section 15-77-300 of the South Carolina Code permits the recovery of attorney’s fees against the State but held that the statute only applies to “civil actions” and a Chief Procurement Officer (“CPO”) proceeding is not a civil action.  The conclusion that a CPO proceeding is not a civil action for purposes of Section 15-77-300 is questionable due to the application of that statute to administrative proceedings in past decisions. See McDowell v. S. Carolina Dep’t of Soc. Servs., 304 S.C. 539, 405 S.E.2d 830 (1991).