April 27, 2006

Contractor Payment Rights

For contractors performing work in Pennsylvania, there are two legal tools available to obtain payment for services rendered. The Contractor and Subcontractor Payment Act (73 Pa.C.S.A.§§ 501-516) applies to private construction projects. The Commonwealth Procurement Code (62 Pa. C.S.A.§§101-4509) applies to contracts involving Commonwealth of Pennsylvania agencies.

The Payment Act and Procurement Code are similar in scope but they each differ in application and remedy. For example, under the Procurement Code, a contractor must pay the subcontractor within 14 days of receipt of the progress payment from the public owner. The Payment Act contains language §507 similar to the Procurement Code and provides that a contractor must pay a subcontractor “14 days after receipt of each progress or final payment or 14 days after receipt of the subcontractor’s invoice, whichever is later.”

The Contractor and Subcontractor Payment Act provides that performance by a contractor or subcontractor in accordance with the provisions of the contract entitles that contractor or sub to payment from the party with whom the contractor or subcontractor has contracted. Section 505(a) states the owner shall pay the contractor in accordance with the terms of the construction contract.

The Payment Act addresses the issue of when payment is due. The Payment Act states that in the absence of another payment term, the payment of interim and final invoices shall be due from the owner twenty (20) days after the end of a billing period or twenty days after delivery of the invoice to the owner, whichever is later. In the case of a subcontractor, payment is due to the subcontractor fourteen (14) days after the contractor's receipt of each progress or final payment or fourteen (14) days after receiving the subcontractor's invoice, whichever is later.

Under §505(d) of the Act provides that the owner shall pay the contractor interest at the rate of one percent (1%) per month beginning on the eighth day after payment is due. Section 507(d) sets forth essentially the same requirement for payments owing to subcontractors. This calculates out to a healthy twelve percent (12%) per year. In addition, if litigation is necessary by the unpaid contractor or subcontractor to recover payment, §512 provides that the arbitrator or court shall award, in addition to other damages due, a penalty equal to one percent (1%) per month of the amount wrongfully withheld. Adding this interest amount to the 12% allowable under §505(d) the combination of interest and penalties can amount to as much as 24%/year.

Under the Commonwealth Procurement Code, if payment is not made within 14 days, interest is to be paid according to §3932 (which references an interest calculation from the Internal Revenue Service for interest payments on overdue taxes or the refund of taxes). The Procurement Code also allows for the payment of a penalty and attorney’s fees but only if the withholding of payment was done in bad faith (§3935). The penalty is equal to 1% per month “of the amount that was withheld in bad faith.” Reasonable attorney’s fees and expenses are may be awarded if “the government agency, contractor or subcontractor acted in bad faith.”

Contract terms still matter in construction contracts notwithstanding the language in the Procurement Code. In American Rock Mechanics, Inc. v. N. Abbonizio Contractors, Inc., 887 A.2d 322 (Pa. Super. 2005), the Superior Court held that the terms of the subcontract between a contractor and subcontractor, not the “pay-when-paid” provision of the Commonwealth Procurement Code (§3933) controlled the rights and obligations of the parties with respect to time for payment. The American Rock court emphasized the importance of the terms of the subcontract document, especially with respect to payment on public projects. Of greater concern to the American Rock Court was the fact that contractual payment provisions will not be defeated by the “pay-when-paid” provision of the Procurement Code. The court focused on the legislative intent of the Procurement Act in reaching its decision.

The effect of specific contract payment terms on §507 of the Contractor and Subcontractor Payment Act (which has the same payment language as §3933 of the Procurement Code) has not been addressed by a Pennsylvania court. 

What It Means to You

Contractors in Pennsylvania have two useful tools available to obtain payment for services rendered under both private and Commonwealth related contracts. The benefits offered by the Contractor and Subcontractor Payment Act and the Commonwealth Procurement Code must be considered when dealing with construction contract disputes. The attorneys at Cipriani & Werner are available to discuss how the Contractor and Subcontractor Payment Act and the Commonwealth Procurement Code may assist you in your business dealings.


73 Pa.C.S.A.§§ 501-516 and 62 Pa. C.S.A. §§101-4509