California Prompt Payment Act: Deadlines, Penalties, and Collection

The California Prompt Payment Act requires state agencies to pay undisputed invoices within 45 days (30 days for construction progress payments), and parallel statutes give local-agency construction contractors a 30-day deadline and subcontractors a seven-day deadline from the prime. When any of those windows is missed, interest or penalties accrue automatically, at rates that run from 10% per year up to 2% per month depending on who owes whom.

Who and What the Rules Cover

Three different statutes do the work, and which one applies depends on the payer and the type of contract.

The Prompt Payment Act itself, at Government Code sections 927 through 927.13, applies to state agencies buying property or services from a private business.¹ Public Contract Code section 20104.50 covers local agencies, defined to include cities, counties, school districts, and other public entities under that part of the code, specifically for construction contracts.² Business and Professions Code section 7108.5 governs the flow of money from prime contractors down to subcontractors on any job.³

Purely private contracts between two businesses without a public agency on the chain fall outside all three.

Payment Deadlines by Contract Type

Every deadline below runs from the day the payer receives a properly submitted invoice or payment request, not from any later approval or processing step.

State Agencies, Non-Construction Contracts

45 calendar days from receipt of a proper invoice.⁴

State Agencies, Construction Progress Payments

30 days from receipt under Public Contract Code section 10261.5. If the State Controller’s Office receives the request from the contracting agency on time but takes more than 15 days to process it, the Controller’s Office bears responsibility for the resulting interest.⁵

Local Agencies, Construction Progress Payments

30 days from receipt of a properly submitted payment request. If the request is defective, the agency has seven days to return it with a written explanation. Any days beyond that seven are subtracted from the 30-day window on the corrected resubmission, so a slow rejection shortens the agency’s own payment deadline.²

Subcontractor and Retention Deadlines

Prime contractors cannot sit on money once it arrives. Under Business and Professions Code section 7108.5, a prime or upper-tier subcontractor must pay each lower-tier sub within seven days of receiving a progress payment, in an amount that reflects that sub’s share of the covered work. The parties can agree in writing to a different timeline, but they cannot write the penalty out of the deal. If part of the amount is in legitimate dispute, the prime may withhold up to 150% of the disputed portion and must release the rest.³

Retention runs on its own clock. Under Civil Code section 8814, when a direct contractor receives all or part of a retention payment from the owner, each subcontractor’s share must be released within 10 days.⁶ A prime can only withhold retention from a sub when the good-faith dispute is directly tied to the retention funds in question; the California Supreme Court has confirmed that a disagreement about some other aspect of performance does not justify holding a retention payment tied to different work.

Penalty Rates When Payment Is Late

Penalties accrue automatically. The rate depends on who owes the money.

State Agency, Non-Construction

Two tiers apply:

Certified small businesses, nonprofits, and Medi-Cal service providers receive the U.S. Prime Rate as of June 30 of the prior fiscal year, plus 10%.
All other businesses receive the Pooled Money Investment Account daily rate as of June 30 of the prior fiscal year, plus 1%, capped at 15%.

Interest runs from the day after the deadline until the agency submits payment to the Controller or pays the contractor directly. The contractor does not need to submit a separate invoice for the penalty; the agency is supposed to calculate and pay it.⁴

Construction Contracts, State or Local

Interest accrues at the legal rate set by Code of Civil Procedure section 685.010, which is 10% per year.⁵²

Prime-to-Subcontractor

2% of the outstanding amount per month, every month the payment is late. The rate is statutory and does not float with market interest rates. The same violation gives the Contractors State License Board grounds to discipline the prime’s license, and the prevailing party in a collection suit recovers attorney’s fees.³

Why the Clock May Not Have Started

The deadlines only run from a properly submitted invoice. If the invoice is missing required information, the agency can return it and the clock resets on the corrected version. This is where most late-payment arguments actually begin.

For local-agency construction work, section 20104.50 requires the request to be properly executed and funds to be available, and obliges the agency to return defective requests within seven days with a written explanation.² For state agency contracts, the specifics of a “proper” invoice come from the contract itself and the State Administrative Manual. At minimum, expect to include the contract number, a description of goods or services, quantities and prices matching the contract terms, and the contractor’s taxpayer identification and payment information.

A state agency that genuinely disputes an invoice must notify the contractor within 15 working days of receiving the invoice or the goods and services, whichever is later. The dispute must rest on “reasonable cause,” which the statute defines to include a mismatch between invoice and contract, a discrepancy between invoiced amounts and actual deliveries, a need for additional supporting documentation, or an improperly completed invoice.⁴

Two other situations can block or delay the standard deadlines. Some government contracts include a funding-availability clause making payment contingent on appropriated funds; no legal payment obligation arises until funds are made available and the contractor receives written confirmation. And a good-faith dispute over defective work can justify withholding, provided the dispute is raised within the applicable window and, for sub retention, is directly relevant to the funds held back.

Collecting What You’re Owed

If an invoice is past due and the agency will not pay, the escalation path depends on who owes the money.

Against a state agency, the Department of General Services runs the Government Claims Program, which accepts claims from businesses asserting the state owes them money.⁷ Filing is often a prerequisite to suing. Under the Government Claims Act, the agency has 45 days to approve, reject, or otherwise act on the claim. Silence counts as rejection by operation of law, and that deemed denial opens the door to a lawsuit.

Against a prime contractor who has not paid a sub, three remedies run in parallel. You can collect the 2% monthly penalty under section 7108.5, file a complaint with the Contractors State License Board seeking discipline against the prime’s license, and bring a collection action in which the prevailing party recovers attorney’s fees. The statute makes these remedies cumulative; using one does not foreclose the others.³

Two Boundaries Worth Noting

If the project is funded with federal dollars, the federal Prompt Payment Act and its implementing regulations may apply instead of California’s rules. Federal agencies generally must pay within 30 days of a proper invoice, with interest at a Treasury Department rate calculated on a 360-day year.⁸⁹

And any penalty interest you eventually collect is taxable. The IRS treats it as ordinary interest income, reportable in the year you receive it, whether or not the paying entity sends you a Form 1099-INT.¹⁰

1
Justia. California Government Code Chapter 4.5 Prompt Payment of Claims
2
California Legislative Information. California Public Contract Code 20104.50
3
California Legislative Information. California Business and Professions Code 7108.5
4
Justia. California Government Code Chapter 4.5 Prompt Payment of Claims – Section 927-927.13
5
California Department of General Services. Interest on Construction Contract Claims – 8473.1
6
California Legislative Information. California Civil Code 8814
7
California Department of General Services. File a Claim
8
Bureau of the Fiscal Service, U.S. Department of the Treasury. Prompt Payment
9
eCFR. 5 CFR 1315.10 – Late Payment Interest Penalties
10
Internal Revenue Service. Topic No. 403, Interest Received