Contractors can charge interest on late payments, but the right to do so has to come from somewhere specific: either a clause in the signed contract or a statute that applies to the job. An after-the-fact line item on an invoice generally will not hold up. Most states have prompt payment laws that create a statutory right to interest even when the contract is silent, and the federal government pays interest automatically on its own late construction bills at 4⅛% per year for the first half of 2026.1Federal Register. Prompt Payment Interest Rate; Contract Disputes Act What you can actually collect depends on your contract, your state, and whether you followed the steps that preserve the right.
Start With What the Contract Says
A signed contract that spells out late-payment interest is the strongest ground to stand on. Courts look for specificity. The rate itself (often stated as a monthly percentage, such as 1.5% per month, which works out to 18% annually), the grace period before interest starts, whether the interest is simple or compound, and whether the clause reaches collection costs as well. Vague references to “applicable interest” or unspecified “late charges” invite argument and may not survive a challenge.
Without a clause, your position weakens sharply. You cannot decide after the fact that you would like to start adding interest to an overdue invoice. The client never agreed to it, and courts are reluctant to enforce a charge the debtor had no notice of when the debt arose. That is exactly the gap prompt payment statutes were written to fill.
Late Fees and Interest Are Not the Same Thing
Contractors sometimes use “late fee” and “interest” as if they meant the same thing. Courts do not. A late fee is a flat charge that hits the moment a payment is overdue, like a fixed $50. Interest is a percentage that accrues continuously on the unpaid balance and grows the longer the money stays out. A judge will not award interest when the contract only authorizes a late fee, and will not award a late fee when the contract only authorizes interest.
This trips up contracts that use loose language. If your agreement says the client owes a “penalty” for late payment but does not say whether that means a one-time charge or an accruing rate, you may end up with neither. The safer approach is to include both, label each clearly, and calculate them separately.
Prompt Payment Laws When the Contract Is Silent
Most states have enacted prompt payment statutes that set deadlines for construction payments and impose automatic interest when those deadlines are missed. The details vary. The shared purpose is to keep owners and general contractors from sitting on money that subcontractors and suppliers have already earned.
A typical state statute establishes a payment window (often 30 days after receipt of a proper invoice) and specifies a statutory interest rate that applies once the deadline passes. Some states peg the rate to a benchmark like the prime rate. Others accept the rate stated in the contract as long as it stays under the usury cap. The important point is that these statutes can supply the interest right that your contract failed to. If you performed the work, submitted a proper invoice, and were not paid on time, the statute itself may entitle you to interest.
Federal Projects
On federal jobs, the rule is explicit. Under 31 U.S.C. § 3902, a federal agency that fails to pay a contractor by the required date must pay an interest penalty running from the day after the deadline through the day payment is made. You do not have to ask for it. If the amount owed is $1.00 or more, the agency must pay it automatically.2Office of the Law Revision Counsel. 31 USC 3902 – Interest Penalties
Treasury sets the applicable rate every six months from short-term Treasury bill yields. From January 1 through June 30, 2026, that rate is 4⅛% per year, and the same rate applies to disputes under the Contract Disputes Act.1Federal Register. Prompt Payment Interest Rate; Contract Disputes Act For federal construction contracts, interest on unearned amounts a contractor must return is computed at the average bond equivalent rate of 91-day Treasury bills from the most recent auction.3Office of the Law Revision Counsel. 31 USC Chapter 39 – Prompt Payment
The Invoice Has to Be Proper Before the Clock Starts
Interest under prompt payment laws only starts running once you have submitted a proper invoice. Federal regulations list what that means: your name, the invoice date, the government contract number, a description of the work with quantities and prices, shipping and payment terms, your taxpayer identification number, and banking information for electronic payment.4eCFR. 5 CFR Part 1315 – Prompt Payment Miss any of them, and the clock does not start. State statutes have their own invoice requirements, but the principle carries: a sloppy or incomplete invoice gives the other party a legitimate reason to reject it and reset the timeline.
This is where contractors quietly lose money. If your invoice is missing a contract number or a detailed description of the work, the client can dispute it as improper, and no interest accrues during the time you spend fixing paperwork. Treat the invoice requirements with the same care you give the contract terms.
Usury Caps Limit How High You Can Go
You cannot charge whatever rate you want. Every state has usury laws capping the maximum interest rate on debts, and a contract clause that exceeds the cap is unenforceable. Consequences vary. Some states reduce the rate to the legal maximum. Others void the interest provision entirely, and a few impose penalties on the creditor.
The caps themselves range widely. Some states set general limits as low as 6%. Others allow rates above 40% for certain commercial transactions. Many states distinguish between consumer and commercial borrowers, with higher caps for business-to-business arrangements. A rate that is legal in one state can be usurious in another, so check the law where the project sits before you set your contract rate.
Simple, Compound, and Partial Payments
When a contract does not specify whether interest is simple or compound, the common-law default is simple. Simple interest accrues only on the original unpaid balance. Compound interest, which accrues on the principal plus previously accumulated interest, has to be explicitly authorized in the contract. If you want compound interest, say so in writing.
Partial payments raise a separate question: does the money reduce the principal or the accrued interest first? The default rule is that a partial payment covers accrued interest before it touches the principal. If a client owes $10,000 in principal and $800 in interest and sends a $2,000 check, the first $800 clears the interest, and the remaining $1,200 knocks the principal down to $8,800. Interest then continues on the reduced balance. Parties can agree to a different allocation in the contract; absent that agreement, this is the order courts apply.
Collecting the Money You’re Owed
An interest clause compensates you for the delay. It does not, by itself, produce a check. When a client ignores the invoices, you need enforcement tools.
Mechanic’s Liens
A mechanic’s lien is a security interest in the property you improved, created by statute to protect unpaid contractors and suppliers. Filing one attaches the debt to the real estate and makes it very difficult for the owner to sell or refinance until the debt is resolved. A properly filed lien covers both the principal and the accrued interest.5Cornell Law School. Mechanic’s Lien
Lien rights are easy to lose. Most states require subcontractors and suppliers to send a preliminary notice to the owner early in the project, often within 20 to 60 days of first providing labor or materials. Miss that window and your lien rights may be gone before you know there is a payment problem. Post-completion filing deadlines are equally strict. These are not deadlines you can extend with a phone call.
Breach of Contract and Small Claims
A straight breach-of-contract suit is always on the table, and you do not need a lien to file one. The lawsuit seeks a judgment for the unpaid invoices, accrued interest if authorized, and potentially attorney fees if the contract includes a prevailing-party fee-shifting clause. Without such a clause, each side pays its own lawyer under the general American rule, so a small unpaid invoice can cost more to litigate than it is worth.
For smaller amounts, small claims court is faster and cheaper. Maximum claim limits range from $2,500 to $25,000 depending on the state, and the process is designed for people without lawyers. If your total, including interest, falls within your state’s cap, this route can close the dispute in weeks.
Don’t Forget Retainage
Retainage is the portion of each progress payment the owner or general contractor withholds until the project is finished, typically 5% to 10% of each invoice. It is standard in construction, and it creates a distinctive late-payment problem: contractors routinely wait months after completion for retainage to be released, and sometimes it does not come without pressure.
Many state prompt payment laws address retainage directly, setting deadlines for when the withheld funds must be returned after substantial completion. On federally assisted projects, the prime contractor generally must release retainage to subcontractors within 30 days of receiving payment from the agency. When retainage is not released within the statutory window, interest penalties apply the same way they would for any other late payment. If your retainage is overdue, the interest clock may already be running in your favor.
Interest You Collect Is Taxable
Interest you receive on late payments is taxable income and is reported the year you receive or accrue it, regardless of whether the client sends you a form.6Internal Revenue Service. Topic No. 403, Interest Received A client that pays you $10 or more in interest in a year is supposed to report it on Form 1099-INT, though many clients paying interest on a construction invoice do not realize they have that filing obligation.7Internal Revenue Service. About Form 1099-INT, Interest Income Track the interest separately from your project revenue so you can report it whether or not the form arrives.