Payment disputes are a fact of life in construction. In New York, the legal landscape around those disputes has shifted in ways that carry real consequences for contractors and subcontractors on both private and public projects. Understanding the requirements is not optional. It affects how you document invoices, how you respond to disputes, and what legal theories are available when payment stalls.
Here is where things stand.
Basic framework
State Finance Law requires state agencies to pay contractors within 30 days of receiving a proper invoice. Late payment triggers interest at a statutory rate. For local government contracts, similar obligations apply under the General Municipal Law, though the specific timelines vary by municipality.
Then there's Article 3-A of the Lien Law, which imposes trust fund obligations on funds received for construction purposes. Owners, contractors, and subcontractors who receive construction funds hold them as trustees for the benefit of those who performed labor and furnished materials.
Diverting those trust funds, paying other obligations before paying the parties who earned the money, is not just a contract breach. It can be a criminal offense.
Tension points
Three areas tend to generate the most disputes under New York's prompt payment law.
Payment timelines downstream
The law imposes an obligation to move payment down the contracting chain, from owner to general contractor to subcontractor to sub-subcontractor, within defined windows once payment is received at the top. Holding payment at one level of the chain while lower-tier contractors wait creates civil liability and, in cases involving trust fund diversion, criminal exposure.
Dispute procedures and withholding requirements
When a party disputes a portion of an invoice, the undisputed portion must still be paid on time. Withholding the entire payment because of a disagreement over part of it is not permitted. Parties who want to contest a portion must do so in writing, with specific reasons, and must release the rest.
Interest and fee-shifting
Late payment triggers statutory interest. In certain circumstances, a party who successfully pursues a prompt payment claim may also recover attorneys' fees, which is a significant deterrent against strategic delay.
The law is designed to keep money moving. Sitting on payment while the clock runs is increasingly expensive.
A recent amendment
On December 19, 2025, Governor Hochul signed Senate Bill S5655, the most significant update to New York's prompt payment requirements since 2023. The amendment addresses a loophole that had allowed owners and general contractors to sidestep the retainage cap the legislature put in place two years earlier.
In November 2023, New York capped retainage at 5% of the contract sum on private construction contracts of $150,000 or more. The intent was clear: limit what could be withheld as leverage during a project. The problem was that Section 756-a of the General Business Law allowed parties to contractually override the Prompt Payment Act. Some owners and GCs were doing exactly that, writing contracts with retainage above 5% and pointing to 756-a as their authority.
The December 2025 amendment closes that door. Any contract provision that requires retainage above 5% on a covered private contract is now void and unenforceable, regardless of what the contract says. Parties cannot contract around the cap.
One practical nuance: the 5% cap applies to the total contract sum, not to each individual progress payment. A party can still withhold 10% retainage during the first half of the project, provided retainage drops to zero for the back half, keeping the total within the ceiling.
The amendment took effect immediately on December 19, 2025, and applies to all contracts entered into on or after that date.
What this means in practice
The trust obligation means that contractors receiving payment from an owner cannot use those funds for other purposes before passing them to subcontractors. That is not optional, and the exposure is not just civil.
Subcontractors have two reasons to understand the requirements. It affects how and when to assert a claim, and it determines which legal theories are available. The distinction between a prompt payment claim and a trust fund diversion claim can significantly affect the remedies available and the urgency with which the claim is treated.
Anyone negotiating a private construction contract right now should look hard at the retainage terms. A provision above 5% on a covered contract is not just aggressive. It is void. Knowing that before you sign is considerably more useful than discovering it after a dispute arises.
The practical message is consistent across every tier: document invoices carefully, respond to disputes in writing, pay the undisputed portion on time, and review retainage provisions in any new contract against the current legal standard.
Nicole Green, Esq. PLLC advises contractors, subcontractors, and nonprofits on construction law, government contracts, and compliance matters in New York.