Get Paid, Not Played: Tennessee’s Prompt Payment Guide

By: Abbie Dierbeck

If you’ve ever wrapped up a job and then found yourself waiting far too long for a check, you’re not alone. In construction, cash flow is everything. Materials, labor, and overhead don’t wait just because an owner or agency is slow to pay. That’s exactly why Tennessee adopted the Prompt Payment Act. The goal is simple: keep money moving and make sure contractors, subcontractors, and suppliers are paid within a reasonable time. Understanding how this law works can make a real difference in protecting your bottom line and knowing when it’s time to push back.

Public vs. Private Payment Timelines

In Tennessee, payment deadlines depend on whether you’re working on a public or private project, and the difference matters. On public jobs (think state, city, or school projects) the agency generally has 45 days to pay after receiving your invoice. Tenn. Code Ann. § 12-4-704. That means once you submit a proper invoice, the clock is ticking, and you should expect payment within that timeframe.

Private projects move a little faster. Owners are required to pay within 30 days after receiving a proper payment request. Tenn. Code Ann. § 66-34-103. For contractors and subs, this shorter timeline is critical because private work often relies more heavily on steady cash flow to keep projects moving.

There’s also an important rule for private jobs when it comes to retainage. Any retainage being held must be released within 90 days of completion or substantial completion—whichever comes first. This prevents owners from holding onto your money indefinitely after the work is done. The takeaway is straightforward: private jobs should pay faster, but both public and private projects come with clear deadlines you can rely on if payment starts to lag.

Interest on Late Payments

When payment doesn’t show up on time, Tennessee law doesn’t just shrug—it adds consequences. The Prompt Payment Act allows contractors to recover interest on late payments at a rate of 1.5% per month (18% annually!), unless your contract specifies a different rate. That’s a meaningful number, especially on larger invoices or longer delays.

On public projects, interest starts accruing the day after payment is due. Tenn. Code Ann. § 12-4-704. On private jobs, interest begins when the payment becomes due and continues until it is actually paid. Tenn. Code Ann. § 66-34-601. Either way, once a payment is late, the meter starts running.

There’s an additional layer for public work that contractors should be aware of. If interest remains unpaid for 60 days, it gets added to the principal amount owed and continues to accrue interest going forward. In other words, interest can compound, making delays increasingly expensive for the party holding the money. This structure is designed to encourage timely payment and discourage owners or agencies from dragging their feet.

Example: Calculating Interest Owed

To see how this works in practice, let’s walk through a simple example. Assume a contractor is owed $10,000 on a private project, and the payment is 60 days overdue. The applicable interest rate is 1.5% per month.

First, calculate the monthly interest:
$10,000 × 1.5% = $150 per month

Next, multiply that by the number of months overdue. At 60 days late, that equals two months:
$150 × 2 = $300 in interest

Finally, add the interest to the original amount owed:
$10,000 + $300 = $10,300 total owed

That’s money the contractor is legally entitled to recover. While $300 may not seem like a huge amount on a single invoice, those numbers can grow quickly across multiple invoices or longer delays. Over time, enforcing interest can make a meaningful difference in keeping projects financially healthy.

Retainage Caps

Retainage is another area where Tennessee law draws a firm line. On construction projects, the amount withheld as retainage cannot exceed 5% of the total contract amount. Tenn. Code Ann. § 66-34-103. If you see more than that being held back, it’s worth a closer look. This cap applies broadly and is meant to prevent excessive withholding that can strain contractors and subcontractors who are already carrying project costs.

Escrow Requirements for Larger Projects

For larger jobs (those with a contract value of $500,000 or more), Tennessee adds another layer of protection. Retainage must be placed in a separate, interest-bearing escrow account with a third-party financial institution. Tenn. Code Ann. § 66-34-104. The party holding the retainage must also provide written notice, including the bank’s name, account details, and the amount deposited. If they fail to do this, the penalty is steep: $300 per day for every day the funds are not properly escrowed. Courts have enforced this strictly, making it clear that compliance is not optional. See Snake Steel, Inc. v. Holladay Construction Group, 625 S.W.3d 830 (2011).

Prompt Payment Compliance Checklist

Payment Timelines

   Public project invoices paid within 45 days of receipt

   Private project payment requests paid within 30 days

Retainage

   Retainage withheld is 5% or less of total contract amount

   Retainage tracked separately from regular payments

Escrow (Projects $500,000+)

   Retainage deposited into a third-party, interest-bearing escrow account

   Escrow account set up with a qualified financial institution

Escrow Compliance

   Written notice provided to contractor/sub including bank name, account number/details, and amount deposited

   Retainage deposited promptly to avoid $300/day penalties

Interest on Late Payments

   Late payments tracked from due date

   Interest calculated at 1.5% per month (unless contract says otherwise)

   Interest added to invoices or payment demands

   On public jobs, unpaid interest added to principal after 60 days

Final Payment

   Project completion or substantial completion date documented

   Retainage released within 90 days of completion

Final Thoughts

The Tennessee Prompt Payment Act is there to protect the people doing the work—contractors, subs, and suppliers who keep projects moving. Knowing these rules gives you leverage. It helps you spot issues early, have informed conversations about payment, and take action when necessary.

At the end of the day, you shouldn’t have to chase money you’ve already earned, and Tennessee law gives you the tools to make sure you don’t have to.