A general contractor receives payment from the owner but fails to pay a subcontractor within 10 days. What penalty interest rate applies under California prompt payment law?
Correct Answer
C) 2% per month
California prompt payment law typically requires 2% per month penalty interest when payments are not made timely after receipt of funds.
Why This Is the Correct Answer
California's prompt payment law (Civil Code Section 8814 for private works and Public Contract Code Section 7108.5 for public works) imposes a penalty interest rate of 2% per month on payments wrongfully withheld. Once a general contractor receives payment from the owner, it must pay subcontractors within the statutory timeframe; failure to do so triggers the 2% monthly penalty on the withheld amount, compounding the contractor's financial exposure.
Why the Other Options Are Wrong
Option A: The prime rate plus 2%
The prime rate plus 2% is not the California statutory penalty for prompt payment violations on construction projects. While prime-rate-based formulas appear in some commercial lending contexts, California's construction prompt payment statute specifies a flat 2% per month penalty, not a variable rate tied to the prime rate.
Option B: 1.5% per month
1.5% per month is the penalty rate for some other California commercial transactions but does not apply to contractor prompt payment violations. The construction-specific statute mandates 2% per month, which is higher and reflects the particular harm caused by delayed payments in the construction payment chain.
Option D: 1% per month
1% per month is too low and does not correspond to California's construction prompt payment penalty. Selecting this rate would understate the contractor's liability. The statutory rate is 2% per month, which on an annual basis equals 24%—a substantial penalty designed to incentivize timely payment.
Memory Technique
California prompt payment = 2% per month penalty. Double it to see the impact: that's 24% per year—comparable to a credit card. The legislature set it high to make prompt payment the path of least resistance. '2% monthly = pay your subs fast or pay dearly.'
More California Questions
A homeowner signs a $15,000 home improvement contract on Monday at 2 PM at the contractor's office. Under California law, what is the latest time the homeowner can cancel the contract without penalty?
A swimming pool contract for $28,000 is signed on Wednesday at the customer's home. The contract includes proper cancellation notices. If the customer wants to cancel, they must do so by when?
Under California's prompt payment law, if a contractor submits a proper payment request to a property owner, payment is due within how many days?
A general contractor hires a subcontractor for $22,000. The general contractor receives payment from the owner but fails to pay the subcontractor within how many days, subjecting themselves to penalty interest?
Under California Civil Code Section 8180, when must a subcontractor serve a preliminary notice on a private work project?
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