The Prompt Payment Act: Know the Rules

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Pennsylvania law permits contractors and subcontractors to recover interest and attorney fees if they aren’t paid on time.  Actually, the law doesn’t just permit these penalties — it mandates them under certain circumstances.  And there are tricky requirements and payment milestones imposed by this law.

This law (fully named the Pennsylvania Subcontractor/Contractor Payment Act) was designed to help contractors get paid on time — even if their contracts aren’t very good.  It applies to all construction projects other than improvements to real property consisting of six or fewer residential units under construction simultaneously.  So, a contractor working on a single residence cannot sue under the act but it could if the construction involved an office building.

It is vital that both sides to any construction contract know the rules of this law.  For contractors, it’s a powerful tool that can tip the balance in your favor if there is a dispute.  And owners must know when — and if — payments can be withheld if there are performance issues.  The following are some highlights:

Owner Payment Obligations:

The act requires “strict” adherence to contract payment terms.  If there are no governing payment terms, the contractor can invoice the owner for progress payments at the end of the billing period and through a final invoice upon completion of the work.  This generally applies to substantial completion of the work.  Unless otherwise agreed, payment of invoices shall be due 20 days after the end of a billing period or 20 days after delivery of the invoice, whichever is later.

The act imposes 1 percent per month (or fraction of the month) interest if a progress or final payment is not paid within 7 days of its due date.

The owner can withhold payment on any deficiency items, but it has to provide notice to the contractor of which items are deficient within 7 days of the date the invoice on that item is received.  Also, the owner has to pay the contractor for any line items that are satisfactorily completed.  This means an owner cannot hold back payment on an entire invoice if only one or two items are deficient.

Owners beware:  Any payment withholding has to be based upon a “good faith” claim.  Proving good faith requires solid documentation and clear communications to the contractor.  The burden on the owner is not very high, but it is necessary to demonstrate some reasonable basis for withholding payment.

Contractor and Subcontractor Payment Obligations:

Contractors and subcontractors — who hire subcontractors — also have payment obligations.  They must disclose the due date for receipt of payments from the owner to subcontractors before executing any contracts .  Any failure to do so obligates the contractor to make payment to its subs as if the payment due dates mentioned above were met by the owner.   Change orders, design changes and impacts due to weather conditions can exempt these provisions from being imposed.

A sub that has performed shall be paid 14 days after the contractor has received a progress or final payment or 14 days after the contract receives the sub’s invoice, whichever is later.  Interest applies if payments are not timely made.  Also, a contractor can withhold payments to subs based upon good faith claims under the same general rules as owners.

Attorney Fees and Interest:

This section provides the act with teeth.  The provisions are straightforward and rigid.  If arbitration or litigation is filed to recover payment due under the act and it is determined that an owner, contractor or subcontractor has failed to comply with the payment terms, the arbitrator or court shall award, in addition to all other damages due, a penalty equal to 1 percent per month of the amount wrongfully withheld.  Good faith claims are not considered to be “wrongfully withheld.”

The act’s attorney fee provisions are equally as onerous.  It states, “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 in an amount to be determined by the court or arbitrator, together with expenses.”

This means that the attorney fee provision of the act can apply even if an underlying contract does not contain an attorney fee provision.  Whatever party the court or arbitrator deems to be the “substantially prevailing party” can get an attorney fee award.  Assume a dispute over $100,000.  The arbitrator finds in favor of an owner for a $50,000.01 offset.  The owner could be considered a substantially prevailing party and entitled to reasonable attorney fees.

Final thoughts:

The act also has provisions that apply to retainage and prepayments, so beware of those situations.  As with every construction contract, it’s necessary to pay attention to the details, document everything and ensure clear communications on every possible issue.  Remember that certain payments can be withheld if there is a good-faith basis for doing so, but it’s incumbent upon owners and contractors to maintain sufficient documentation.

Sina cera,

Julian

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