Contractor Subcontractor Payment Act in PA

Collection of Payment for Construction or Renovation

Construction contractors and subcontractors often struggle to get paid for their work on a real property.

Contractor and Subcontractor Payment Act

The Contractor and Subcontractor Payment Act ("the Act") creates a powerful tool for collection of money for new construction or property renovation.  

The Act Only Applies to Commercial Construction / Renovation 

Importantly the Contractor Subcontractor Payment Act only applies to commercial construction. Thus, the Act has no application whatsoever to home improvement or home construction contracts. The contractor risks violating Pennsylvania's Unfair Trade Practices and Consumer Protection Law (UTPCPL) by inducing a home owner to pay a contractor pursuant to the Contractor and Subcontractor Payment Act. Click here for more.   

 

Who Can Assert the Act? 

The Act allows a subcontractor or contractor to bring an action for payment for work against the party with whom it contracted for the work.  This includes the property owner. As such, the Act's name -- "Contractor and Subcontractor Payment Act" -- is deceiving. In fact, the Act also governs duties of property owners to make payment to any contractor or subcontractor with whom they have a contract.    

 

Deadline to Make Payment

If payment is not timely made, the contractor or subcontractor may enforce the right to payment. Alternatively, the contractor may cease or suspend further work. For more, here are the actual deadlines stated in the Act:  

(c) [P]ayment of interim and final invoices shall be due from the owner 20 days after the end of a billing period or 20 days after delivery of the invoice, whichever is later.

(d) [I]f any progress or final payment to a contractor is not paid within seven days of the due date established in subsection (c), the owner shall pay the contractor ...  interest at the rate of 1% per month or fraction of a month on the balance that is at the time due and owing.

(e) Suspension of performance.--

(1) If payment is not received by a contractor in accordance with this section, the contractor shall have the right to suspend performance of any work, without penalty, until payment is received according to the terms of the construction contract. Any procedure in a construction contract that exceeds the procedure in paragraph (2) shall be unenforceable.

 

Authority to Withhold Certain Payments to a Contractor of Subcontractor

The Act provides that a party owing money to a contractor or subcontractor may withhold money for deficient work.  However, the party withholding money must pay for all other items on that job that were completed without issue.  The Act provides: 

(a) Authority to withhold.--The contractor or subcontractor may withhold payment from any subcontractor responsible for a deficiency item. The contractor or subcontractor shall pay any subcontractor according to the provisions of this act for any item which appears on the invoice and has been satisfactorily completed.

Note, however, the Act embodies an easy -- and surprising --  way to waive the right to assert a "deficiency item," as described below.  

 

Waiver of Defenses to Payment - IMPORTANT

 

The Act provides for automatic waiver of one's rights to challenge payment, for defective or deficient or incomplete work. In fact, regarding waiver, the Act provides as follows: 

(b) Notice.--
(1) .. if an owner withholds payment from a contractor for a deficiency item, the amount withheld shall be reasonable and the owner shall notify the contractor of the deficiency item by a written explanation of its good faith reason within 14 calendar days of the date that the invoice is received.
(2) Failure to comply with paragraph (1) shall constitute a waiver of the basis to withhold payment and necessitate payment of the contractor in full for the invoice.

Hence, a property owner has certain duties to challenge payment for for work.  Likewise, the same applies in regard to a contractor challenging payment to a subcontractor for an alleged "deficiency".  There, as above, the same notice must be given, or waiver occurs. 

Regarding waiver, this is the real "meat" of the Act, where a party unfamiliar with the Act can get into serious trouble. Common sense dictates: no payment is due for obviously defective or incomplete work.  However, in this instance, relying on "common sense" here can be dangerous.  

 

Can Payment Duties be Altered by Contract? 

 Yes and no (but mostly no).

Duties pursuant the Act exist independent of any contract.  The one exception pertains the time during which payment must be made. For example, the parties can agree for an invoice to be payable within ten (10) days, versus twenty (20).  

Regarding waiver, "Unless specifically authorized under this act, parties to a contract or other agreement may not waive a provision of this act by contract or other agreement."

Moreover, as for the award of attorney fees, the Act remains unforgiving. For example, it provides: "notwithstanding any agreement to the contrary, the substantially prevailing party in any proceeding to recover any payment under this act shall be awarded a reasonable attorney fee..."  

 

Penalties for Non-Compliance Resulting in a Lawsuit or Claim in Arbitration 

The Act provides for penalties (interest) and the award of costs for wrongfully withholding payment.  Plus, the Act affords the same rights, whether the person enforcing the Act does so in court or contractual arbitration:

Section 12. Penalty and attorney fee. (a) Penalty for failure to comply with act.--

(1) If arbitration or litigation is commenced to recover payment due under this act and it is determined that an owner, contractor or subcontractor has failed to comply with the payment terms of this act, the arbitrator or court shall award, in addition to all other damages due, a penalty equal to 1% per month of the amount that was wrongfully withheld.

Note that this cuts both ways. The Act entitles he "prevailing party" to an award of his costs and fees, which may entitle the Defendant to such relief.    

 

Defenses to the Act

The Act references certain defenses.  In particular, these include:  

• • • • The amount withheld "bears a reasonable relation to the value of any claim held in good faith" and no waiver (above) has occurred.  
  • Secondly, the construction or improvement relates to home improvement, as mentioned.  
  • Third, "This act shall not apply to improvements to real property which consists of six or fewer residential units which are under construction simultaneously."
  • Owner's exclusion.--This act shall not apply to contracts for the purchase of materials by a person performing work on his or her own real property.