It’s that time of year! New legislation has just been passed, and construction businesses are preparing to incorporate the changes into their current processes. In Pennsylvania, some interesting changes have been made regarding the right to suspend work for nonpayment and the right to withhold payments. Luckily, there’s plenty of time. The new rules won’t go into effect until October 10th. Still, Pennsylvania contractors and subcontractors should start preparing sooner than later.
These changes come pursuant to HB 566 which passed last week.
New Rules for Pennsylvania Contractors and Subcontractors
Pennsylvania seems to make construction payment news pretty often. Just last year, the state introduced an online directory to ease the burden of communication on construction jobs (you can learn more about the directory here). Further, Pennsylvania is home to a cutting-edge P3 Bridge Replacement Program.
The new rules that came out of this legislative session aren’t quite as attention-grabbing as either of those stories, but they do create some requirements all contractors and subs should be aware of.
Let’s break the changes down into 3 categories: (1) The Right to Stop Work, (2) Withholding Payment, and (3) Other.
As noted in this article, regulation won’t fix the construction payment problem: Construction Has A Payment Emergency. More Regulation Is A Fake Answer.
The Right to Stop Work
The new rules state that a contractor or subcontractor can stop work via the process set out by their contract. That process cannot be more burdensome than the process set out by statute. If there is no process set out in the contract, then it goes as follows:
First, a prime contractor must wait 30 days after the end of the billing period. Then, they must provide written notice to the owner or their designee (via email or postal service) notifying them of the nonpayment. 30 days after that notice is sent, another notice is in order. This time, a Notice of Intent to Suspend Performance is sent (via certified mail). This document notifies recipients that if payment isn’t made within 10 days, work will be suspended. So, after a mere 70 days of nonpayment, work may be suspended.
It’s mostly the same for subcontractors, but with a worse time frame.
73 § 507(c) requires payments be made to subs within 14 days of their customer receiving payment or within 14 days of the sub sending the customer their invoice – whichever is later. If payment isn’t made, 30 days later that sub or supplier is able to send an initial notice that payment is overdue. 30 days after that notice is sent (a total of 64 days after payment was due), the sub can send a Notice of Intent to Suspend Performance. 10 days after this Notice of Intent, a subcontractor may finally suspend performance. So, after a whopping 74 days of nonpayment, a sub or supplier can finally suspend work. Whew.
The new Pennsylvania rules on withholding payment are reminiscent of this recent supreme court decision in California: California Retainage Laws Make More Sense After Supreme Court Ruling.
For owners withholding payment from contractors, the rules got a little tighter. The amount withheld must be reasonable, and the owner must provide a Notice of Withholding. Meaning, a written explanation of the good faith reason for withholding must be sent within 14 calendar days of the receiving the invoice. If an owner doesn’t send that written explanation, they can no longer withhold payment. Subsequent invoices would need to be paid in full, even where valid issues are present. Plus, if the owner will be withholding payment, they can only do so for deficiency items. All other items invoiced that are satisfactorily completed must be paid.
Contractors or subs withholding payments down the chain must follow the same rules as above. Written explanation (aka Notice of Withholding) must be provided within 14 days of receiving notice of the deficiency item. Only amounts that relate to deficiency items may be withheld. Satisfactorily completed items must be paid. Plus, a failure to comply with the notice of withholding will result in the loss of the ability to withhold future payments.
Incorrect Invoice. In Pennsylvania, if there’s an error in an invoice, the party in receipt of the flawed invoice must provide written notice to the invoicing party within 10 days. Under the new legislation, the correct amount of the invoice must still be sent once written notice is received by the party who sent the incorrect invoice.
Security Posted for Release of Retainage. Under HB 566, upon the substantial completion of their work, a contractor or a subcontractor can facilitate the release of retainage owed to them before the project’s overall completion. They can do this by posting security. Specifically, a bond equal to 120% of the amount of retainage owed must be posted.
Penalties for Wrongful Withholding. Finally, if a dispute goes to litigation or arbitration and amounts are deemed wrongfully withheld, statutory penalties will apply. In additional to all other damages due, 1% interest per month will be applied. However, amounts won’t be considered wrongfully withheld if: (1) there’s a reasonable relation to the amount withheld and the value of the claim; and (2) a Notice of Withholding was sent.
Don’t panic! Remember – these changes don’t go into effect until October. There’s plenty of time to prepare.