Pennsylvania Construction Law Update: Contractor and Subcontractor Payment Act Updates

June 14, 2018

Executive Summary: Recent amendments to the Pennsylvania Contractor and Subcontractor Payment Act include the following changes:

  • prohibiting the contractual waiver of CASPA’s provisions;
  • establishing a framework authorizing contractors and subcontractors to suspend performance of work for non-payment;
  • strengthening enforcement of requirements for owners, contractors, and subcontractors to withhold payment for deficiency items and errors in documentation by waiving issues not timely and properly raised;
  • allowing for the posting of a maintenance bond to facilitate the release of withheld retainage; and
  • adjusting the penalty interest provisions to reflect the amendments.

These amendments take effect on October 10, 2018.

Be prepared! If you are engaged in a private construction project in Pennsylvania, read the full article below and consult a construction attorney at Eckert Seamans for further comment and analysis. Don’t be caught off guard. These changes will affect your project!!!

On June 12th, Governor Wolf signed amendments to the Pennsylvania Contractor and Subcontractor Payment Act (“CASPA”) into law that clarify its enforceability and expand parties’ rights and obligations in the payment process. These amendments directly address contractual waiver of CASPA’s terms, the right to suspend work for non-payment, withholding of payment for deficiency items and invoice documentation errors, posting of security to facilitate release of retainage, and the applicability of penalty interest under the terms of these amendments. Owners, contractors, and subcontractors on non-public construction projects are directly affected by these changes.

Prohibition on waiver. CASPA’s prior language did not directly specify whether its requirements could be waived by the terms of a contract. Without such guidance, parties were left to argue the enforceability of waiver provisions in construction contracts. The amendments directly prohibit the contractual waiver of any provision of CASPA, unless specifically authorized elsewhere in the Act. This prohibition provides clarity and avoids attempts to circumvent the provisions meant to level the playing field in the payment process.

Suspension of performance. The amendments authorize contractors and subcontractors to suspend performance of work without penalty if payment provisions are not followed. This is a huge shift in leverage, as it removes much of the risk that has prevented contractors and subcontractors from walking off jobs in the past. Owners must be much more conservative in their approach to payment disputes or face delays borne out of work stoppages. CASPA spells out the circumstances that must be met prior to suspending work, so consult an attorney before such action is taken.

Withholding of payment for good faith claims. Prior to the amendments, an owner was permitted to withhold payment for deficiency items according to the terms of the construction contract, provided the owner provided the contractor notice of the deficiency within 7 days of receipt of the invoice. Contractors were provided the same right with regard to payment of subcontractors. As a practical matter, the notice provision was inconsistently and haphazardly enforced. Courts rarely held an owner or contractor accountable for failing to meet these notice requirements. The amendments will change this in multiple respects. First, the amendments include subcontractors in this section. Second, the amendments now explicitly require that amounts withheld be reasonable. Third, notice of the deficiency must be in writing and owners have 14 calendar days after receipt of the invoice to provide such notice. Fourth, failure to meet the notice requirement constitutes a waiver of the basis to withhold payment and necessitates payment in the full invoice amount. Finally, in the event of payment being withheld due to a deficiency, payment for satisfactorily completed work is required to be made pursuant to the terms of the contract. These changes will make it necessary for Owners and their respective representatives to stay vigilant and apprised of the status of work so that they are able to quickly react to invoices for deficient work.

Errors in documentation. To withhold payment for errors in documentation, the payer must provide written notice of the errors within 10 working days of receipt of the invoice and must timely pay the correct amount per the terms of the contract.

Posting of security in lieu of retainage. The amendments provide that “[u]pon reaching substantial completion of its own scope of work, a contractor or subcontractor may facilitate the release of retainage on its contract before final completion of the project by posting a maintenance bond with approved surety for 120% of the amount of retainage being held.” Withholding retainage for more than 30 days after final acceptance of the work shall be subject to the same notice requirements for withholding due to deficiency items, discussed above.

Penalty for failure to comply. An owner, contractor, or subcontractor is insulated from claims that an amount was wrongfully withheld if the amount bears a reasonable relation to the value of any claim held in good faith and all notice requirements for deficiency items are met. Otherwise, the amount withheld is subject to penalty interest of 1% per month.

These amendments take effect on October 10, 2018.

As the effective date draws nearer, consult a construction attorney at Eckert Seamans for further comment and analysis.

This Pennsylvania Construction Law Update is intended to keep readers current on matters impacting construction law and is not intended as legal advice. If you have any questions, please contact Matthew J. Whipple or any attorney in Eckert Seamans’ Construction Law Group with whom you have been working.

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