Significant Changes to the Pennsylvania Contractor and Subcontractor Payment Act to Take Effect in October 2018

Those active in the construction industry are all too familiar with the increasingly common struggle of contractors and subcontractors getting paid for the work they perform. When financial disputes arise, the outcome is often a lengthy battle resulting in payments being withheld for weeks, months or even years after work is complete.  In 1994, the Pennsylvania General Assembly enacted the Contractor and Subcontractor Payment Act (73 P.S. § 501) to cure abuses in the construction industry stemming from nonpayment by owners, contractors and subcontractors to lower tier subcontractors.  The Act applies to all private commercial construction projects and residential projects involving six or more units under construction simultaneously. The Act was designed to create a system of prompt payment obligations, with financial penalties for those who failed to comply. However, while the intent was to ensure contractors and subcontractors were being promptly paid for the work they performed, the Act created a number of loopholes whereby those who owed money could lawfully withhold payment.

In June of this year, Pennsylvania Governor Tom Wolf signed House Bill 566, which  significantly changes the Act by closing the nonpayment loopholes used to withhold funds. Among a number of other changes, as of October 10, 2018, the Act will now include the following protections for contractors and subcontractors:

• Prohibition against waivers in an underlying construction contract of the Act’s requirements and applicability;
• Ability for a contractor or subcontractor to suspend performance of work without penalty if payment is not received in accordance with the terms of the underlying construction contract;
• A written explanation of the good faith reason for non-payment within 14 days of receipt of an invoice must be provided to withhold payment;
• Failure to provide the written notice with a good faith reason for withholding payment constitutes a waiver of the right to withhold and results in an obligation to pay in full for the invoice;
• Contractors and subcontractors must be paid for all uncontested work that is not the subject of a written complaint; and
• If a contract provides for a retainage, the retainage must be released within 30 days of acceptance of the work, unless the contractor or subcontractor receives a written explanation of deficiency items.

These changes create considerably more stringent regulations that owners, contractors and subcontractors must adhere to after receipt of an invoice for work performed. Failure to comply with the Act’s new regulations result in hefty fines; aggrieved parties can be entitled to collect the principal amount of the debt, plus up to 24 percent per annum in interest and penalties, and be fully reimbursed  for all reasonable attorneys’ fees and expenses. Please contact this author, Megan Albright at Megan.Albright@saul.com, or any member of the firm’s Construction Practice Group to learn more about this new law, or any other construction-related issues.