PENNSYLVANIA'S CONTRACTOR and SUBCONTRACTOR PAYMENT ACT
I. Introduction
The Pennsylvania Contractor and Subcontractor Payment Act (the "Payment Act") was passed to minimize the ability of higher tier participants such as owners and prime contractors to hold back funds from lower tier parties such as subcontractors and material providers. The Payment Act generally requires that contractors, subcontractors and material suppliers furnishing labor for a project be paid promptly. The Payment Act applies to all construction projects in Pennsylvania except "improvements to real property which consist of six or fewer residential units which are under construction simultaneously" and "contracts for the purchase of materials by a person performing work on his or her own real property". Accordingly, Payment Act has application to all commercial construction projects in Pennsylvania. The act broadly mandates that "performance by a contractor or subcontractor in accordance with the provisions of a contract shall entitle a contractor or subcontractor to payment from the party with whom the contractor or subcontractor has contracted." In the definition of section of the Payment Act a subcontractor is defined to include not just the person who has furnished labor but also a party who has furnished materials. Various sections of this statute (summarized in more detail below) impose very specific obligations on owners, contractors and subcontractors with respect to payment on construction projects, and provide for certain penalties (including interest and attorney fee recovery provisions) for violations.
II. Owner's Payment Obligations
The Payment Act requires an owner to "pay the contractor strictly in accordance with terms of the construction contract." In the absence of a written construction contract or where the contract does not contain the payment term, the contractor is nonetheless entitled to progress payments and payment in full when the work in completed. If the parties have not agreed to the contrary, invoices submitted to the owner are due "20 days after the end of the billing period or 20 days after delivery of the invoice, whichever is later." Additionally, if payment is not made within seven days after the 20 day deadline, the owner is required to pay the contractor "beginning on the eighth day, interest at a rate of 1% per month or fraction of a month on the balance that is at the time due and owing." Notwithstanding the payment requirements and deadlines referenced above, an owner is permitted to withhold payment for "deficiency items" in accordance with the terms of the construction contract involved. Nonetheless, if payment is being withheld from a contractor for a "deficiency item", the owner is required to "notify the contractor of the deficiency item within seven days of the date that the invoice is received." In this connection, "deficiency item" is defined as "work performed which the owner, contractor or inspector will not certify as completed according to the specifications of a construction contract."
III. Contractor's/Subcontractor's Payment Obligations
Payment obligations of contractors and subcontractors are also governed by the Payment Act which generally mandates that "performance by a subcontractor [including a material supplier] in accordance with the provisions of the contract shall entitle the subcontractor to payment from the party with whom this subcontractor has contracted."
Interestingly, contractors and subcontractors are required to disclosed to their subcontractors and material suppliers due dates for receipt of payments from the owner before the subcontract involved is signed. If a contractor/subcontractor fails to accurately disclose these due dates, that party is nonetheless obligated to pay its subcontractor as though the owner had paid "20 days after the billing period or 20 days after delivery of the invoice, whichever is later" whether or not the owner has indeed made payments within those time frames. An exemption to these payment date requirements is permitted for "a change of due dates because of conditions outside of the contractor's control, including, but not limited to design changes, change orders or delays in construction due to weather conditions."
"Pay-When-Paid" requirements are also imposed on contractors and subcontractors with respect to their subcontractor and material suppliers on a project. This section of the Payment Act requires that when a subcontractor has performed according to that party's contract, the contractor involved shall pay "the full or proportional amount received for each subcontractor's work and materials, based on work completed or service provided under the subcontract, 14 days after receipt of each progress or final payment or 14 days after receipt of the subcontractors invoice, whichever is later, unless payment is being withheld for a "deficiency item." If any payment to a contractor is delayed beyond the deadlines established by the Payment Act, interest on the amount owing again accrues at a rate of 1% per month in the same manner as applies to late payments by an owner to a contractor.
Accordingly, if a contractor receives payment for work it has performed, it must timely pay amounts owing to its subcontractors and material suppliers applicable to labor and materials they have provided that are covered by the payment involved.
Notwithstanding the foregoing, contractors or subcontractors may withhold payment from their subcontractors and material suppliers for "deficiency items" in the same fashion as an owner may withhold payment from a prime contractor for such an item, provided again, that subcontractor or supplier that is having its payment withheld and the owner have both been notified of the reason within seven days after receiving notice of the deficiency item.
IV. Retainage
The subject of retainage is also addressed by the Payment Act. The statute mandates that upon final completion of the contractors work, all retainage amounts are to be paid within 30 days after final acceptance thereof. If an owner is not withholding retainage, the contractor may nonetheless withhold payment from a subcontractor in accordance with their agreement, provided that any such retainage also must be paid within 30 days after final acceptance of the subcontractors work (labor and/or materials).
The "Pay-When-Paid" provisions that apply to other payments from contractors to subcontractors and material suppliers also apply to retainage amounts, as does the 1 % interest accruals if retainage amounts are not paid within the required 14 day period.
V. Penalties/Attorney Fees
The Payment Act also provides for the award of additional penalties and attorneys fees. If an aggrieved party finds it necessary to commence arbitration or litigation to recover payment and the tribunal determines that the owner, contractor, or subcontractor has violated the payment terms of the statute, "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." An amount is deemed to be wrongfully withheld if it does not bear "a reasonable relation to the value of any claim held in good faith by the owner, contractor or subcontractor against whom [payment is being sought]." When this 1% per month penalty is added to the 1% per month interest allowed in other sections of the statute for late payment, an aggregate interest award of 24% per annum (a hefty rate in today's world) can be awarded against a party that fails to comply with the statutory payment requirements.
Even potentially more significant is a section of the statute which provides that "the substantially prevailing party in any proceedings to recover payment under this Act shall be awarded a reasonable attorney fee in an amount to be determined by the court of arbitrator, together with expenses." Significantly, by the language of the statute itself, the attorney fee recovery provisions apply even if the parties have otherwise agreed to the contrary. Moreover, an action brought under the Payment Act is in all cases subject to the laws and judicial jurisdiction of the Commonwealth of Pennsylvania, as any contractual provisions to the contrary "shall be unenforceable."
