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Payment of Contractors and Subcontractors in Pennsylvania

PAYMENT OF CONTRACTORS AND SUBCONTRACTORS IN PENNSYLVANIA

By: Cornelius Van Galen, Esq. (vangalenlaw.com)

April 7, 2015

            This article is not meant to be comprehensive, or to be relied upon as a substitute for advice from an attorney. The purpose of this article is to increase the reader's general understanding of the Pennsylvania Contractor and Subcontractor Payment Act, and in the appropriate circumstances, of its use to secure payment under a construction contract.

            First the bad news. The Pennsylvania Contractor and Subcontractor Payment Act does not apply to residential construction, unless the contract in question involves of simultaneous construction of seven or more residential units. The good news, the Act can be a powerful tool in settling payment disputes on terms favorable to the contractor making the claim for payment.

            The Pennsylvania Contractor and Subcontractor Payment Act (the “CASPA”, found at 73 Pa. Stat. Ann. sections 501-516) is a statute that provides rules and deadlines to ensure prompt payment to contractors and subcontractors on private construction projects. The work covered by the Act includes the erection, alteration, demolition, excavation, clearing, grading, or filling of real property, including all or any part of a building or structure.

The purpose of CASPA is to protect contractors and subcontractors and to encourage fair dealing among parties to a construction contact. Under the circumstances described in the statue, interest, penalty, attorney's fees and litigation expenses may be imposed on an owner, contractor or subcontractor who fails to make payment to a contractor or subcontractor in compliance with the statute.

            The CASPA applies to a private construction contract, which is defined as a written or oral agreement to perform work on any real property located within Pennsylvania. The CASPA is not meant to usurp the terms of the contract between the parties, which will dictate the parties' obligations, including payment. For example, if the contract so provides, the owner may withhold payment for work which does not conform to the specifications of the construction contract.

Under the CASPA, when a contractor or subcontractor performs, he is entitled to payment from the party with whom the contractor or subcontractor has contracted. The duty to pay arises and the timetable for payment commences when the contractor submits an application for payment, or as otherwise described by the contract between the parties. Payment to the contractor in turn starts the time running on the contractor's duty to pay subcontractors, and so on down the line.

The contractor pays its subcontractors, who in turn pay their respective subcontractors, within fourteen days of receipt of payment or 14 days after receipt of the contractors invoice, whichever is later.

A contractor may withhold retainage on a subcontractor if their agreement so provides, even if the owner does not withhold retainage on the contractor. However, payment to the subcontractor must be made within 30 days of final acceptance of the work.

            In the absence of a construction contract, or in the event that the construction contract does not contain language governing the terms of payment, the contractor shall be entitled to invoice the owner for progress payments at the end of the billing period. The contractor shall be entitled to submit a final invoice for payment in full upon completion of the agreed upon work.

            Except as otherwise agreed by the parties, payment of interim and final invoices is due from the owner 20 days after the end of a billing period, or 20 days after delivery of the invoice, whichever is later. If the owner withholds payment from the contractor for a deficiency item, it must notify the contractor of the deficiency item within 7 calendar days of the date the invoice was received.

Before the subcontract is signed a contractor or subcontractor must disclose to their subcontractor the due date for receipt of payments from the owner. If that information is not provided then all payments are due within 20 days after the end of the billing period or 20 days after delivery of the invoice, whichever is later.

To assert a claim under the CASPA, the claimant must first establish a contractual right to payment pursuant to a written or oral construction contract, and the breach of that contract. The terms that the parties have agreed to define their obligations to one another. The CAPSA provides remedies in addition to those available in an ordinary breach of contract action.  

An owner, contractor or subcontractor who fails to comply with the CASPA, in addition with all other damages due, would be obligated to pay a penalty equal to 1% per month of the amount wrongfully withheld. Further, if an owner, contractor or subcontractor unreasonably withholds acceptance of the work or fails to pay retainage as required, they are subject to payment of interest at the rate of 1% per month on the balance due and owing on the date acceptance  was unreasonably withheld or the date the retainage was due and owing, whichever is applicable.

            Once a contractor has made payment to the subcontractor according to the terms of the construction contract or the CASPA, future claims for payment against the contractor by parties' owed payment from the subcontractor which has been paid are barred.

            The possibility of having to pay attorney's fees, court costs, 1% interest per month and 1% penalty per month should motivate owners and contractors to fulfill their payment obligations to contractors and subcontractors before litigation is commenced against them. Those same remedies should also make litigation more attractive to contractors and subcontractors owed money.

            If you are located in Pennsylvania and have questions about the Pennsylvania Contractor and Subcontractor Payment Act please feel free to e-mail me at [email protected]  

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