When a client in California drags their feet on a progress payment, you act as an unsecured lender for their project. Every day that invoice sits unpaid past its net terms, your cash bleeds out as carrying costs. Understanding the state's prompt-payment statutes and allowable interest rates is fundamental for protecting your operating margins.
Under California Civil Code 8800, owners of private projects must pay prime contractors within 30 days of a valid progress payment request. Primes must pay subcontractors within 7 days.
Maximum Allowable Interest (Private): 2% per month (24% annually) as a penalty
Public Contract Code 10261.5 requires state agencies to pay prime contractors within 30 days. Primes must pay subs within 7 days.
Maximum Allowable Interest (Public): 10% annually
Consider a scenario where you are owed $100000 on a completed milestone, and the payment is 60 days past the statutory deadline or your contract terms. Based on common statutory limits, the carrying cost you might legally be entitled to recover can accumulate quickly. For example, if you applied an appropriate rate under California law, the delay could cost the client an additional $4000.00 in interest.
You aren't just slapping an arbitrary fee on the invoice; you are recovering the actual financial damage caused by the delay, backed by state legislation.
To protect yourself, your master service agreement must include a clear, unambiguous clause regarding late payments. A recommended practice is to cite the maximum allowable rate under California law as a cap, defaulting to the statutory rate if your contract rate is deemed usurious.
Interest terms must be consistently communicated. They should be printed on every single invoice you send, typically near the total due. Using a clear internal standard operating procedure (SOP) ensures these rules are applied objectively, removing emotion from the collections process.
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