This blog is part of an ongoing series discussing the Pennsylvania Mechanics’ Lien Law. For more information on Mechanics’ Liens in Pennsylvania, click here.
If you’re in the Contracting business, you know well that performing professional work and keeping your customer happy is only half of what is required to maintain a financially healthy business. The other half of the Contracting business is the challenge of getting paid for good work already performed, after you have paid suppliers and met payroll, and when your attention has turned to new jobs needed to keep you in business. For Subcontractors, unscrupulous General Contractors compound the problem of getting paid for good work already completed when they withhold funds allocated to your work long after the work has been accepted and paid for by the owner. Too often, an unscrupulous General Contractor will take advantage of its ability to “squeeze” a Subcontractor, knowing that the Subcontractor may accept reduced payment in order to meet its operating expenses.
Most Contractors and Subcontractors are familiar with Mechanics’ Liens to ensure payment by an owner of General Contractor, however, Mechanics’ Liens are not always an effective and efficient means to force payment. Often, the property will be sold or a General Contractor paid in full by an Owner before a Contractor or Subcontractor files a Lien limiting the effectiveness of the Lien. In addition, Mechanics Liens, though a valuable tool, limit the Claimant’s recovery to the value of the work performed, and do not allow an aggrieved party to seek an amount which reflects the costs of grossly delayed payments by an Owner or General Contractor.
In a perfect world, owners would pay Contractors on time, and Contractors would pay Subcontractors on time and in full. Although Pennsylvania isn’t a perfect world, in 1994 the Pennsylvania Legislature made life for Contractors and Subcontractors a bit easier by enacting the Pennsylvania Contractor/Subcontractor Payment Act. (“the Act”) The Act provides for adherence to payment deadlines to encourage fair dealing among parties to all commercial Construction Contracts, as well as residential Construction Contracts with six (6) or more units simultaneously under construction in the Commonwealth. In addition, the Legislature provided a “Hammer” for Contractors and Subcontractors in the form of statutory authorization for a Court or Arbitrator to award interest and penalties on payment amounts which are withheld by Owners or Contractors which do not reasonably relate to deficiencies in the work performed. The interest and penalties under the Act are each calculated at the rate of 1% of the wrongfully withheld payment per month. For example, if an owner wrongfully withholds payment for the period of one (1) year, a Contractor is entitled to interest in the amount of 12% of what is withheld, as well as penalties in the amount of 12%, for a total of 24% of the amount wrongfully withheld by the Owner or General Contractor.
Additionally, if a claim is brought pursuant to the Act and a Contractor or Subcontractor is a “substantially prevailing party,” the Act entitles the Contractor or Subcontractor to an award of attorneys’ fees. Beware, however, that a “substantially prevailing party” under the Act can be either the Plaintiff or Defendant – if a Contractor or Subcontractor brings a claim under the Act for payment which a Court later determines is reasonably related to deficiencies in the work, the Court can then award attorneys’ fees to an Owner or General Contractor who rightfully refused to pay in full.
In short, the Contractor/Subcontractor Payment Act provides a valuable tool to ensure prompt payment in full for Contractors and Subcontractors which perform good work for Owners and General Contractors in the Commonwealth. Waiving the “Hammer” of interest, penalties, and attorneys’ fees under the Act can motivate a slow paying Owner or unscrupulous General Contractor to reconsider the decision to withhold payment in full without good cause.