When the Division of Local Government Services (DLGS), in the State of New Jersey Department of Community Affairs issued Local Finance Notice (LFN 2019-02), it probably sounded familiar to local government contracting units. This LFN, New Prompt Payment Requirement for Goods and Services: Local Public & Public School Contract Laws was issued in response to New Jersey Chapter Laws P.L. 2018, c. 127 and does not change the prompt payment requirements for improvements to real property and structures signed into law in 2006 and described in LFN 2006-21. Those requirements will be described in a separate article, Are You in Compliance with Prompt Payment Laws? (Part 2).

Where the 2006 law dealt with the prompt payment on construction contracts, this new law deals with the prompt payment of just about everything else. Effective for goods or services contracts awarded to a business concern on or after February 1, 2019, this law has provisions for contracting units under both Local Public Contracts Law (LPCL) and Public School Contracts Law (PSCL). The law applies to contracts for any dollar amount.

What is a business concern as defined by the new law?

A contracting unit must make prompt payment to most vendors that it does direct business with for goods and services. The law defines a business concern as any person (including corporate entities, limited liability companies, partnerships and other for-profit and non-profit business entities), engaged in a trade or business, including a private nonprofit entity operating as an independent contractor, providing goods or services directly to a contracting unit or to a designated third party and operating pursuant to a contract with a contracting unit which requires either a single payment or multiple payments. The law does not apply to public utilities as defined in N.J.S.A. 48:2-13, investor-owned public utilities (e.g. electric, gas, water) or contracts between government entities. The law also does not apply to third party contractors.

Understanding Payment Deadlines and Interest Charged for Late Payment

Some of the provisions in the new law are different dependent on which contracts law applies to the contracting unit.

Local Public Contracts Law

• If the payment date is specified in the contract, the prompt payment deadline is sixty (60) calendar days from the date specified in the contract.
• If the payment date is not specified in the contract, the prompt payment deadline is the later of sixty (60) calendar days from receipt of a properly executed invoice; or sixty (60) calendar days from the date the goods or services were received (as certified by an officer or duly designated employee).
• The deadline for the separate payment of interest to the vendor for late payment is within 30 calendar days of the date the contracting unit made the late payment.

Public School Contracts Law

• If the payment date is specified in the contract, the prompt payment deadline is ninety (90) calendar days from the date specified in the contract.
• If the payment date is not specified in the contract, the prompt payment deadline is the later of ninety (90) calendar days from receipt of a properly executed invoice; or ninety (90) calendar days from the date the goods or services were received (as certified by an officer or duly designated employee).
• The deadline for the separate payment of interest to the vendor for late payment is within 30 calendar days of the date the contracting unit made the late payment.

Based on these provisions in the law, it is important to understand that the certification that goods or services have been received should include the date of receipt and that designated third-party recipients of the goods and services should provide the contracting unit with a notification of receipt. In accordance with N.J.S.A 40A:5-16(b) or 18A:19-3, a contracting unit shall certify that goods or services have been received before making payment.

The contracts laws define the term, properly executed invoice as an invoice containing sufficient detail for the payment to be made and it is understood to include bills, vouchers, warrants, or whatever term the contracting unit uses to describe the document submitted by the vendor. Where the law requires a claimant certification, it is necessary to have a properly executed invoice. Guidance on claimant certification requirements can be obtained at N.J.S.A. 40A:5-17, 18A:19-2, N.J.A.C. 5:30-9A and LFN 2018-13.

What if the contracting unit challenges the invoice?

The contracting unit should determine what is not satisfactory with the invoice and accept or reject all or portions of the invoice. If portions are undisputed, those portions should be paid in accordance with the receipt of a properly executed invoice and the vendor should be notified timely of the reasons for the rejection, specifying how to cure the defect.

How much interest can the vendor charge?

With late payments, the vendor can charge interest beginning on the day after the required payment due date and ending on the date on which the check or electronic payment is drawn. This penalty should only be paid if the goods or services had been received. The interest rate shall be the rate specified by the State Treasurer for State late payments in accordance with N.J.S.A. 52:32-35. The interest rate for State Fiscal Year 2019 is 2.0% and at the time of the publication of this article, State of New Jersey Circular 19-07-OMB has not been replaced for State Fiscal Year 2020. Updates will be provided on the website of the Division of Local Government Services. If there are circumstances beyond the control of the contracting unit such as a strike or natural disaster, legal counsel should be consulted before declining to pay the late-payment interest being charged.

Are the contracting unit’s payment of claims procedures ready for timely compliance?

The policy and procedures for the payment of claims follow N.J.S.A. 18A:19-1 et seq. and N.J.A.C. 6A:23-2.11(a) 1 for schools and N.J.S.A 40A:5-17 for all other contracting units. If the purchase requires governing body approval before payment, the contracting unit must arrange their meeting agendas and internal review procedures to ensure that the governing body can approve bills at any meeting. The law does not permit a contracting unit to restrict bill approval to those public meetings where “formal action” is taken if it will prevent meeting payment deadlines. This may already be in place since 2006 to comply with prompt payment of construction contracts which is described in part 2 of this article.

What other provisions of the law are important to know?

• The requirements for certifying the availability of funds is not altered by this law. LFN 2017-10 and 2018-13 provide information on the certification of availability funds and on electronic funds transfers.
• The law applies to cooperative purchasing. Unless the master contract states otherwise, a contracting unit ordering directly from a vendor shall follow the deadline in the law that would have applied had it not used a cooperative contract.
• Joint purchasing agreements should be reviewed to ensure the payment schedule for all registered members will allow the lead agency to make prompt payment.
• Purchasing under national cooperative? The law does not apply to these contracts unless the contracting unit and the vendor agree. The bid specifications and contracts should be reviewed for any specified payment deadlines.
• The law applies to purchases made under state contracts.

Conclusion

The goods and services provided by vendors are often critical to ensuring that a contracting unit performs properly and effectively the functions needed to serve its various stakeholders.  At the same time, vendors depend on timely payment, as unwarranted payment delays may adversely affect their ability to provide services and could lead to a decision to no longer contract with the local government unit.  This new law and the one from 2006 for construction contacts were established to foster a good faith relationship between vendors, including construction contractors, and the local government contracting units in the State of New Jersey.Are you in compliance with prompt payment laws?  If not, review your policies and procedures and seek legal or other professional assistance if necessary. This two-part series continues with Are You in Compliance with Prompt Payment Laws? (Part 2).