Texas Construction Law Blog

Timely payment is essential to the success of any construction project, but it is particularly critical on public works projects, where contractors and subcontractors often operate with limited leverage against governmental entities. To address this concern, Texas has enacted the Payment for Goods and Services Act, codified in Chapter 2251 of the Texas Government Code. This post outlines the key provisions of Chapter 2251 and explains how they operate in practice.

What is the Payment for Goods and Services Act?

The Payment for Goods and Services Act is designed to ensure that governmental entities, and those who contract with them, pay for goods and services within defined timeframes. It applies across all tiers of a public construction project, governing payments not only between governmental entities and prime contractors, but also between downstream contractors, subcontractors, and suppliers.

One of the statute’s most important features is its prohibition on waiver. A party may not waive any rights or remedies granted by Chapter 2251, and any attempt to do so is void. As a result, contractual provisions cannot override the statute’s baseline protections for prompt payment.

Payment Deadlines for Governmental Entities

Under Chapter 2251, a payment by a governmental entity becomes overdue on the 31st day after the later of:

• the date the goods are received;
• the date the services are completed; or
• the date the governmental entity receives an invoice.

However, if the governmental entity’s governing body meets only once per month (or less frequently), the deadline is extended, and payment becomes overdue on the 46th day following the same triggering events.

Payment Obligations Down the Contracting Chain

The Act imposes additional requirements to ensure that payments made by governmental entities are promptly distributed to downstream parties. A prime contractor that receives payment from a governmental entity must pay its subcontractors within ten days. Subcontractors are subject to the same requirement with respect to lower-tier subcontractors. In each case, the payment becomes overdue on the eleventh day after receipt of funds.

Interest on Late Payments

Chapter 2251 enforces its payment requirements through the automatic accrual of interest. Once a payment becomes overdue, interest begins to accrue at a rate equal to one percent plus the prime rate published in the Wall Street Journal as of the prior July. Interest continues to accrue until payment is made, with the statute providing specific rules for determining when payment is deemed to have occurred.

Exceptions: When Payment May Be Delayed

Although the statute establishes firm payment deadlines, those deadlines are not absolute. Chapter 2251 recognizes several circumstances in which payment may be delayed without violating the Act. These include situations where there is a bona fide dispute regarding the goods or services provided, where disputes exist between contractors and subcontractors that affect payment, where federal funding restrictions prevent timely payment, and where an invoice has not been submitted in strict compliance with the purchasing entity’s instructions.

In practice, these exceptions are frequently invoked. The central question in many disputes is not whether payment is late, but whether the delay is justified. A “bona fide dispute,” in particular, must be real and supportable. Courts and counterparties are unlikely to accept a dispute that exists in name only or is raised solely as a basis to delay payment.

Disputed Payments: Notice, Withholding, and Interest

Chapter 2251 imposes structure on the handling of disputed invoices. A governmental entity must notify the vendor of any error or disputed amount no later than the twenty-first day after receiving the invoice. That notice must include a detailed statement identifying the disputed portion.

Even where a dispute exists, the statute limits the amount that may be withheld. The governmental entity may withhold no more than 110 percent of the disputed amount, and the undisputed portion must still be paid in accordance with statutory deadlines.

The outcome of the dispute determines how interest applies. If the dispute is resolved in favor of the vendor, interest accrues from the original due date. If the dispute is resolved in favor of the governmental entity, the vendor must submit a corrected invoice, and a new payment timeline begins. If that corrected invoice is not paid on time, interest again begins to accrue.

This framework prevents all-or-nothing withholding while preserving the ability to contest legitimate issues.

Attorney’s Fees and Enforcement Risk

Chapter 2251 provides an additional enforcement mechanism through fee-shifting. In any administrative or judicial proceeding to recover payment or accrued interest, the prevailing party is entitled to recover its reasonable attorney’s fees. This provision changes the dynamics of payment disputes. Because fee exposure runs both directions, both governmental entities and contractors must evaluate their positions carefully before allowing a dispute to escalate.

Suspension of Work for Nonpayment

The statute also provides contractors and subcontractors with the right to suspend performance for nonpayment. A contractor may suspend work if the governmental entity fails to pay an undisputed amount within the statutory timeframe, provided that the contractor gives written notice of nonpayment and an intent to suspend. The contractor must wait at least ten days after providing notice before suspending performance.

If the statutory requirements are satisfied, the contractor is not obligated to continue work until payment is made, may recover demobilization and remobilization costs, and will not be liable for damages resulting from the suspension. These protections do not apply, however, if the governmental entity provides written notice that payment has been made or that a bona fide dispute exists, supported by specific reasons.

Subcontractors have comparable rights. They may suspend performance if the governmental entity has not paid the contractor, or if the contractor has been paid but fails to pay downstream. As with prime contractors, strict compliance with the notice requirements is essential.

With respect to a contract entered into by the Texas Department of Transportation for the construction or maintenance of a highway or a related facility, additional timing and notice requirements apply, including a longer waiting period before suspension.

Unsigned Change Orders

A relatively recent addition to Chapter 2251 addresses the common problem of unsigned change orders. A contractor or subcontractor is not required to proceed with additional work directed by a governmental entity or upstream contractor if there is no written, fully executed change order and the value of that work, when combined with prior unpaid change-directed work, exceeds ten percent of the original contract amount.

In that situation, the contractor or subcontractor may refuse to proceed and will not be liable for damages associated with that decision. This provision provides meaningful protection against being compelled to perform significant extra work without agreed compensation.

Practical Takeaways

Chapter 2251 functions as a comprehensive system governing payment, disputes, and remedies on public construction projects. Payments must be made on statutory timelines, but those timelines are shaped by exceptions for bona fide disputes and procedural requirements such as proper invoicing. Disputed amounts must be identified promptly and cannot be used to delay payment of undisputed sums. When payment is wrongfully withheld, interest accrues automatically, and the prevailing party may recover attorney’s fees.

Equally important, the statute provides real remedies. Contractors and subcontractors are not confined to waiting indefinitely for payment; they may suspend work, recover costs associated with that suspension, and rely on statutory protections relating to disputed work and unsigned change orders.