What does your standard contract say about interest on late payments? If little or nothing, you may be making an expensive mistake. Here’s an example.

In fall of 2016, a hailstorm damaged Alex Bixby’s Iowa home. JL Construction Services gave Bixby a written bid for repairs, $8,050 for the roofing and $1,735 for new window wraps. Bixby authorized JL to start work. There was no written contract.

By August 2017, JL had completed their work on the roof. JL gave Bixby a bill for that portion of the job, $8,050. Bixby didn’t pay. His understanding was that payment was due when both roof repair and window wrap was complete. The window part of the job hadn’t started yet.

By December 2017, Bixby had a complaint. His roof was leaking, probably due to a torn rubber boot JL had installed around a vent pipe.

By January 2018, JL still had not been paid. JL offered to complete the job – the window wraps. Bixby explained that another company was finishing the job. Plus, Bixby claimed a credit for damage from the leaking rubber boot. And that’s where the job stood for nearly a year.

On November 28, 2018, JL’s attorney sent a demand for $8,933.83, including interest at 1.5% a month (18% per annum) from the date of completion. Bixby still refused to pay.

On July 1, 2020, JL sued Bixby, claiming $8,050 for the roofing work plus $3,800 in interest.

Nothing in the oral contract required payment of interest on any amount due. Nothing in JL’s statements complied with Iowa law on interest. That left the court no grounds to award interest as part of JL’s damages.

Earlier this month, the Court of Appeals of Iowa affirmed the trial court decision. Too bad. JL waited nearly three years to get paid and lost their claim for $3,800 in interest.

How to Collect Interest

First, understand that your contracts should set an interest rate for late payments. That lays the foundation for an award of interest if you have to sue. This late payment fee is not a finance charge. You expect to be paid in full when each phase of the work is complete. Interest is due only if payment is delayed.

Second, understand another advantage of setting an interest rate in the contract. It’s just common sense. If you’re not paid on time, remind the owner that interest is accruing at the agreed rate. Worst case, you’ll waive the interest charge in exchange for prompt payment.

Third, understand that the law on interest rates is different in every state. Many states have prompt payment statutes for construction. Some of these laws apply only to subcontracts or only to public works construction or only to commercial (non-residential) projects. Others apply on all projects, including residential work. Some prompt payment statutes set a maximum (or minimum) interest charge for late payments. Others allow higher or lower rates if specified in the contract. Usury laws in some states set a maximum interest rate for delinquent accounts.

So what should you do? The answer is simple. Let Construction Contract Writer be your guide – no matter the state and no matter the type of project. With Construction Contract Writer, you see the interest rate options that apply on your job. That makes setting the interest rate an easy choice – and could save or make your thousands. The trial version of Construction Contract Writer is free.

What does your standard contract say about interest on late payments?

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