The Contractor Subcontractor Payment Act: An Overview
The ultimate goal of the Contractor Subcontractor Payment Act ("CSPA") is to ensure that a contractor or subcontractor who does not receive a payment within thirty-five (35) days of submitting a progress bill or payment application "may record a claim of lien against the owner’s property as security for the claim of the contractor or subcontractor." To accomplish this goal, CSPA establishes specific time limits that a prime or general contractor must pay its subcontractor, and a subcontractor must pay its sub-subcontractor, for work completed on a project in order to preserve its right to claim a lien on the owner’s property.
As with most statutes , there are very specific time periods that must be strictly complied with. Under the CSPA, a prime or general contractor has seven (7) days to "[g]ive notice to the subcontractor of the amount . . . being withheld on each progress payment." A subcontractor has seven (7) days from receiving a progress payment to pay a lower tier subcontractor or vendor. These time limitations are critical because there is no way for a construction industry participant to otherwise secure payment for work performed, i.e., absent a contractual provision, it cannot file a lien upon the owner’s property.
Core Provisions of the Contractor Payment Act
The Contractor Subcontractor Payment Act establishes a range of requirements for parties involved in commercial construction projects. Some of its key provisions include:
- Payment within agreed-upon timeframe. Sections 5 and 6 require that, upon receipt of an invoice from a contractor, a property owner must pay the contractor within a certain amount of time. For residential projects, this means 30 days after receiving the invoice. For commercial projects, this likely is 10 days after the completion of the work. The time limit on invoices issued from contractors to their subcontractors is 10 days.
- Penalties for noncompliance. Should the owner of a residential property fail to pay a contractor within 30 days, the owner will be required to pay the contractor the amount owed, plus 1% interest for every month the payment is late. A contractor who fails to pay a subcontractor their due balance within 10 days will owe the subcontractor a $50 penalty and an additional 1.5% interest for each month passed the due date.
- Legal recourse. The Payment Act stipulates that a contractor or subcontractor can sue for damages if they have not received their fair compensation for work performed on a commercial or residential project. If the contractor or subcontractor wins the suit, the owner must pay the amount due, in addition to 1.5 times any damages awarded, as well as attorney fees.
The provisions of the Contractor Subcontractor Payment Act are some of the best ways for the Construction Law Group to maximize the chances our clients get the money they deserve for the jobs they complete.
The Rights and Obligations Under the Payment Act
The Act accords various rights and responsibilities to contractors and subcontractors. Contractors are required to take specific actions in order to have protection under or to comply with the Act. Subcontractors also have rights, but under the Act, they have more responsibilities than contractors. In fact, for subcontractors, failure to comply with any technical requirement of the Act could mean forfeiture of the right to compel payment from the contractor or to seek a lien against the owner’s property. However, subcontractors can still benefit from the Act by adhering to some technical requirements and taking advantage of the contractor’s compliance with the Act.
Contractors must comply with § 228 of the Act by making timely payments to their subcontractors, regardless of the payment schedule set forth in their contracts. Contractors also have a responsibility to pay their subcontractors unless there are "justifiable" reasons not to do so; such as noncompliance by the subcontractor with its agreement with the contractor, or fraud or bad-faith performance by the subcontractor. Of course, after making payments to subcontractors, contractors have the right to enforce their agreements with those subcontractors, including by withholding future payments as necessary. Importantly, however, contractors have the ultimate risk of loss if the owner do not pay them. Subcontractors cannot serve a stop notice upon the owner directly. Instead, the subcontractor may file a mechanic’s lien on the owner’s property for reliquidation purposes, or it may compel the contractor to issue such a notice if no previous notice has been issued.
Subcontractors must comply with the notice provision section of the Act. A subcontractor must record, on at least four separate occasions during the course of construction, a written notice of its contract with the owner. The first notice must be within ten days after the subcontractor enters into a contract with the contractor. The second notice must be within five days after the subcontractor receives the notice from the contractor that the general contractor has been awarded its contract, and copies of the notices exchanged by the general contractor and the owner. The third notice must be within five days after the subcontractor receives the notice that the notice of settlement or final invoice was received, and a copy of the settlement statement, when applicable. The fourth and final notice must be within five days after the subcontractor receives the notice that the building contract has been completed. A subcontractor who filed these notices may issue a lien notice directly to the owner of the property. Also, subcontractors must file suit against the contractor within 90 days after its last payment to the contractor, including providing a copy to the commissioning authority. A subcontractor’s motion for a "lien for payment" is due within 270 days after the final payment by the owner for the work, or 10 days after the contractor’s payment to it with 10 days afterwards upon receipt of a copy of the settlement statement or final invoice from the contractor.
Compliance with the Act’s technical requirements is crucial to "the basic contract between the parties." While the Act protects subcontractors from the financially unsound actions of the owner and/or the contractor, subcontractors must protect themselves to the extent necessary by complying with the Act.
Payment Act Impact on Project/Program Management
The Contractor Subcontractor Payment Act is designed to ensure that well-managed payments are made throughout the duration of a project. There are two ways that needs to be thought about:
Managing the Project
The main impact the Act has on project management is to allow you to be able to better allocate your resources and utilize your available cash. Utilizing cash effectively in construction means:
Being able to know that you will have ready access to the cash you need means that you will be able to plan the most efficient and productive use of the workers, subcontractors, materials and equipment available to you.
How the Act Affects the Budget
The Act also affects the way the budget for your construction project is laid out. As already established, the Act allows the subcontractor to ask for progress payments in the same manner as the contractor, however, it’s important to understand that the payment process is one that begins at the bottom and works its way up. Payments begin when you submit a request for payment including a sworn statement, which allows all of the lower-tier subcontractors to receive payment. This process might seem somewhat simple, meaning that there is no need to give it much thought when working on the budget, but there are two major areas where this is not the case. First, it means that you, as the prime contractor, will not just receive payment in the amount of the total of your payments to your subcontractors (unless all your work was self-performed, in which case you truly are the prime contractor). This is because the Act allows for limits on how fast any payment may be made. As such, even though you may be works toward completing the entire project, you may find that you need to wait for progress payments to actually be paid to you within the limits described above. In other words, the Act merely changed which party is waiting to be paid. The second area where the Act impacts the budget is that it is meant to act as a type of protection for you, such that the procedures for making payment are laid out in a manner that makes it easier to enforce those rights. Unfortunately, that improvement over prior versions does not bring it into the modern-day, where construction accounting is no longer based on the submission of sworn statements. As such, you still need to ensure that the records you keep are up to date and accurate if you wish to take advantage of its protections.
Consequences for Failure to Comply with the Act
The Contractor Subcontractor Payment Act imposes strict obligations on parties and sets forth a detailed step-by-step remedial scheme in the event it determines that a party has failed to comply with its strict requirements.
As a general rule, any participating party who either (1) fails to send a payment within the designated time period of the CSPA obligations or (2) violates the terms of the Contract, is liable to the other participating party for "double the amount owed to the aggrieved participating party and reasonable costs of collection, including attorney’s fees, if the payor does not pay the amount owed within 30 days of the time it is found due under section 8." See 62 P.S. § 503.
However, the CSPA provides other remedies. For example, an organization can seek a writ of mandamus against any payment obligor compelling them to make a payment "due" under the Act. However, an action in mandamus is not available to determine whether a particular entity is a contractor, subcontractor, or other participating party under the Act. A petition for a writ of mandamus seeking to compel the payment of money is generally granted only where the right to payment is clear and certain and the failure to pay is unapologetic and grossly negligent. Accordingly , the issuance of an order in mandamus is not intended to be a substitute action to settle disputes between contracting parties over the validity of the underlying contract or the right to receive payment.
In addition, "[a]ny payor who fails to comply with the terms of a known contract shall be liable to the other party to the contract for the amount of any actual damages sustained by reason of the violation and for court costs and reasonable counsel fees incurred in enforcement of the contract." This does not affect the rights to adjudicate the validity of the contract or any of its provisions. Consequently, the contractor is not entitled to the discretionary award of double damages upon a finding that the payor failed to comply with the terms of the contract. Where the terms of the contract provide otherwise, the court shall award the minimum damages as prescribed by the contract. Thus, nonpayment may constitute a breach of the contract for which the nonpaying party is liable for damages, but such liability does not necessarily constitute a violation of the CSPA, for which double damages could be awarded.
Necessary Steps to Ensure Statute/Regulation Compliance
Taking steps to ensure your compliance with the Act starts and ends with ensuring you stay on top of the payments you are receiving and sending. For a Contractor, this means making sure you pay your subcontractors each month. For a Subcontractor, this means making sure you get paid each month. As much pain as the Act allows of Contractors who do not pay their Subcontractors, the Act also allows Subcontractors to suffer some pain in trying to get paid by a recalcitrant Contractor. A few quick tips around records and in getting paid can make all the difference in getting through the rough spots.
Contractors and Subcontractors are expected to maintain detailed records of the payments they are supposed to receive and the payments they are scheduled to make. This includes all invoices, all correspondence regarding payments, all documentation attached to invoices, and all proof that payments were made. In other words, all checks, deposit statements, and cash withdrawal slips. This is a lot of paper, and keeping them organized may be time consuming, but it is much more time consuming (and expensive) when you get into a dispute and need to establish the fact that you paid or were supposed to get paid by a certain date. The alternative is more litigation over liability, and all the attendant costs associated with that.
When you are not getting paid, keep on top of it. Make sure that the Contract and any Subcontract require payment at a certain time. Sending a notice or invoice at least a week before you are supposed to get paid can often yield dividends. It shows that you are not simply waiting for a payment just to get paid. Often, you will find that someone in the chain has neglected to submit the proper request for payment or invoice elsewhere, or the Contractor has simply forgotten to submit. This has the added benefit of getting you ahead of the problem, and allowing you to go back to work more quickly.
One of the most helpful things a Contractor or Subcontractor can do for themselves is to find a good bonding company or bank that they can rely on to help them get through the lean times. These bonds and loans will often give you more certainty that you can get paid eventually, and that you can handle any cash flow problems you have. It will show those upstream, whether customers, general contractors or principals, that you can and will pay them, which will increase your reputation for financial reliability, and get you more projects.
Courts have recognized that, when Subcontractors or Contractors do not pay properly, it can tie up an entire system of contractual relationship, like a chain. When Contractors or Subcontractors have not paid, they can cause others to withhold payment. As such, a Subcontractor or a Contractor can withhold payment as long as they have not been paid. However, if a Subcontractor withholds payment improperly, if the main Contractor then withholds payment, the Subcontractor cannot relieve themselves of liability by saying they were only withholding payment to get what they were owed. Also, if this turns into litigation, the other side will have an easier time establishing that the withholding of payments was improper.
Records are really important here, too. If there are improvements in the project that the Subcontractor believes have increased the value of the work, this is not the same as withholding the allowances for that work. It is the same as saying that the Contractor has to pay extra on something that should be part of the original contract. The Construction Lien Reform Act will only allow Owners to withhold amounts equal to the amount that the Contractor has withheld. Any extra will be penalties. By maintaining good records, the Subcontractor can show that he was owed the full amount, and that he withheld his parts of the money until he got paid. By doing this, you can minimize the damages that you suffer.
I have seen Contractors and Subcontractors utilize this Act to make life miserable for one another, and make it cheaper to settle than to fight. This is the purpose of the law. The legislation here was meant to protect the legitimate paying party, and to allow them to take advantage of this aspect of the law to force compliance on the other side. When these parties, however, use the law improperly to gain leverage for no good reason, it is both a painful and costly situation to deal with.
Recent Changes to the Act
In response to suggestions and concerns regarding the Contractor Subcontractor Payment Act, a number of changes fell under two recent pieces of legislation, which became effective on August 22, 2014 and September 9, 2014.
Timely Filing of Claims
First, claims must be submitted to the prime contractor within 30 days of the payment due date. If there is no payment made by the 30th day, then a claim must be submitted to the prime contractor, who is required to submit the claim to the owner within 30 days of the claim. If the prime contractor does not submit the claim within 30 days, then the prime contractor must send a copy of the claim to the owner himself. The main purpose behind this amendment was obviously to speed up the process. If there is no payment made due to no payment at all or the disputed amount, then the amendment provides a very short time frame in which to bring claims for nonpayment.
Notice of Nonpayment
Second, the notice of nonpayment must be served within seven (7) days after the period for making payment expires. This means upon the expiration of the 30-day window described above, the subcontractor must serve the notice of nonpayment within the following seven (7) days. Any claim that is required to be served on the owner that is submitted after the 7-day window will be dismissed.
The Impact of the Pay When Paid Clause
Third , the final portion of the Contractor Subcontractor Payment Act was to specifically modify the rights of parties under a "pay when paid" clause. These types of clauses are common in construction contracts and the purpose behind a "pay when paid" clause is to allow for delays in payment without adversely affecting either the contractor or subcontractor. Although a pay when paid clause allows a contractor to delay payment until it receives payment from the owner, it does not affect (i) the subcontractor from furnishing labor and materials to the construction project during the delay period or (ii) the subcontractor’s ability to bring a claim for nonpayment during the delay period.
A "pay when paid" clause by itself will not relieve a contractor of its duties under the Contractor Subcontractor Payment Act. One caveat to this rule is that as soon as a contractor delays the payment of a subcontractor in more than one (1) calendar month, the "pay when paid" clause "shall not apply to any further payments due the subcontractor until payment is actually made to the contractor by the owner." Furthermore, a contractor may not rely on the "pay when paid" clause as a reason for denying a subcontractor’s request for compensation, no matter how supported the "pay when paid" clause of the contract may be unless it meets certain conditions, including the condition that the contract clearly expresses the intent that the "pay when paid" clause shall apply to a claim of delay compensation.
If any conditions to the "pay when paid" clause are not satisfied by the contractor, then the clause, as written in the contract, cannot delay payments to the subcontractor under the Contractor Subcontractor Payment Act.