What is the penalty interest rate that must be paid on late payments under California's prompt payment law?
Correct Answer
A) 2% per month
California prompt payment law requires penalty interest of 2% per month on late payments to contractors and subcontractors.
Why This Is the Correct Answer
California's prompt payment statutes (Business & Professions Code and Civil Code) prescribe a penalty interest rate of 2% per month on late payments owed to contractors and subcontractors. This rate is intentionally punitive to discourage withheld payments.
Why the Other Options Are Wrong
Option B: 1.5% per month
1.5% per month is incorrect. While 1.5% per month (18% annually) is a common commercial penalty rate in other contexts, California's prompt payment law specifies the higher rate of 2% per month (24% annually) for construction payments.
Option C: The prime rate plus 3%
Prime rate plus 3% is a floating rate used in some federal contracts and lending contexts, not California's prompt payment statute. California uses a fixed 2% per month for simplicity and certainty.
Option D: 1% per month
1% per month understates the penalty. The legislature set 2% per month to create a meaningful deterrent — 1% would be insufficient incentive to pay on time.
Memory Technique
2% = 2 parties protected (contractor and sub). The rate is 2, the parties are 2 — double protection for double the common rate.
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?
Which of the following contracts is NOT subject to the 3-day right to cancel under California law?
A subcontractor completes roofing work on Tuesday, March 15th. The general contractor is paid by the owner on Friday, March 25th. Under California prompt payment laws, what is the latest date the general contractor must pay the subcontractor?
A contractor receives a progress payment of $18,000 from a property owner on Monday. The contractor owes subcontractors $12,000 of this amount. By what day must the contractor pay the subcontractors?
A swimming pool contractor enters into a $45,000 contract to install an in-ground pool. The contract includes a $5,000 down payment. What is the maximum down payment the contractor can legally collect under California law?
A contractor completes $15,000 worth of electrical work on a commercial building. The property owner disputes $3,000 of the charges. Under California prompt payment law, what amount must the owner pay within the required timeframe to avoid penalties?
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