Anyone who has ever done any amount of work as a construction contractor or subcontractor or represented them in collections cases has learned from hard experience that it can be all but impossible to get paid for one's work. If an owner disputes any details of the work, the contractor may go months or more without any source of revenue to cover the contractor's outlays for labor and materials. Further down the food chain, if a contractor is using its revenue from one job to pay bills on another, as is often the case, a sub who has helped the contractor complete a job may suddenly find that the money has disappeared while the contractor has moved on to bigger and better jobs. For a contractor or sub without significant cash reserves, not being paid on a large job can lead to paying bills on one job out of advances from the next. Going unpaid on a second or third job then can stretch resources to the breaking point, resulting in a contractor's undoing.
Historically, unpaid contractors and subs have found some recourse in Pennsylvania's Mechanics' Lien Law, which allows for a quick pre-judgment lien to prevent the improved property from being sold out from under the unpaid party. However, even if the contractor or sub is able to meet the short deadlines of the Mechanics' Lien Law, most developers now require contractors and subs to sign mechanic's lien waivers before they are permitted to start work. As a result, the mechanics' lien is an increasingly unavailable remedy.
The Pennsylvania Legislature entered the fray in 1994, when it passed the Contractor and Subcontractor Payment Act, located at 73 P.S. § 501, et seq. The Act was intended to provide contractors and subs with additional remedies against persons or companies not inclined to pay them for their services. The Act applies to all construction contract and subcontracts within the Commonwealth, with the exception of small residential construction projects involving six or fewer residential units under construction simultaneously. The Act also contains a "Home Depot" exclusion, providing that it does not apply to contracts for the purchase of materials by a person performing work on his or her own property.
Following its definitions and exclusions, the Act begins with a number of unremarkable mandates. Section 504 of the Act provides that performance by a contractor or subcontractor in accordance with the provisions of the contract entitles that contractor or sub to payment from the party with whom the contractor or subcontractor has contracted. Section 505(a) states the obvious once again in providing that the project owner shall pay the contractor strictly in accordance with the terms of the construction contract. Thus far, the Act does nothing but clarify what has long been the common law of Pennsylvania.
After this inauspicious start, the Act begins to acquire teeth. First, the Act addresses a problem in many construction contracts-the lack of a term indicating when payment is due. The Act has filled this gap by providing that in the absence of another payment term, the payment of interim and final invoices shall be due from the owner twenty (20) days after the end of a billing period or twenty days after delivery of the invoice to the owner, whichever is later. In the case of a subcontractor, payment is due to the sub fourteen (14) days after the contractor's receipt of each progress or final payment or fourteen (14) days after receiving the subcontractor's invoice, whichever is later.
But it is some of the less prominent provisions of the Act that end up being the most important. Section 505(d) of the Act provides that the owner shall pay the contractor interest at the rate of one percent (1%) per month beginning on the eighth day after payment is due. Section 507(d) sets forth essentially the same requirement for payments owing to subcontractors. In itself, twelve percent (12%) per year is significant in that it is double the legal rate of interest available on other contract claims.
However, if the unpaid contractor or sub must commence litigation to recover payment due, and if the court or arbitration panel determines that the owner or contractor has failed to comply with the payment terms of the Act, Section 512 provides that the arbitrator or court shall award, in addition to other damages due, a penalty equal to one percent (1%) per month of the amount wrongfully withheld. In short, if a contractor or sub must resort to litigation to recover the amounts due, the combined total of interest and penalties can amount to as much as twenty-four percent (24%) per year.
Even in the bygone days of double digit stock market returns, this steep rate of interest and penalties provided recalcitrant owners and contractors with ample incentive to pay their obligations in a timely manner. But the Act goes even further. In addition to twenty-four percent (24%) interest and penalties, Section 512 also permits a court or arbitration panel to award reasonable attorney's fees to "the substantially prevailing party" in any proceeding to recover any payment due under the Act.
The Pennsylvania legislature also recognized that the prospect of twenty-four percent (24%) interest and penalties carries with it the potential for unscrupulous contractors and subs to obtain unfair advantage against owners or contractors who have a genuine basis for withholding payment. Thus, while the legislature properly sought to provide contractors and subs with appropriate financial leverage for getting paid what they are due, the legislature also sought to prevent contractors and subs from using this leverage unfairly. Section 506 of the Act permits an owner to withhold payment for deficiency items, or items not yet satisfactorily completed in accordance with the terms of the contract, provided that the owner notify the contractor of the deficiency item within seven (7) days after receiving the invoice. Section 511 provides contractors with similar protection as to claims made by subs.
The Act also addresses the question of retainage. If a construction contract provides for a retainage to ensure the contractor or subcontractor's full performance, Section 509 requires that the retainage must be released to the contractor or sub within thirty (30) days after final acceptance of the work. If an owner or contractor unreasonably withholds acceptance of the work or otherwise fails to pay the retainage, the party withholding payments is subject to the same interest, penalties and counsel fees noted above.
As noted above, mechanics lien waivers have diluted the usefulness of the Mechanics Lien Law as a remedy for unpaid contractors. The Contractor and Subcontractor Payment Act specifically provides that the one percent per month interest rate of Section 505 can be waived, but is silent on whether the one percent per month penalty can also be waived, and there is not yet any appellate court authority on this issue.
Section 512, on the other hand, provides that attorney fees and expenses can be awarded to the substantially prevailing party "notwithstanding any agreement to the contrary." So even if parties to a construction contract agree to a waiver of the one percent interest rate, the unwaivable counsel fee provisions and the arguably unwaivable penalty provisions should provide owners and contractors with a significant incentive to pay their bills.
In a business environment where cutthroat practices have pushed many a small contractor to the edge of insolvency, the Contractor and Subcontractor Payment Act has given unpaid contractors and subs a tool to push back.
The attorneys at Wolf, Baldwin & Associates, P.C. have been practicing law primarily in Montgomery County, Berks County, and Chester County for a combined total of over one hundred and twenty-five years. Being general practitioners, we have the breadth of knowledge to help you learn and protect your rights in a wide range of civil litigation cases. Let us help you discover your rights. You owe it to yourself. Please click here to contact us now to schedule an appointment, so that we can help you collect your invoices or defend a subcontractor's claim.