When it Comes to Collections, Construction Professionals Have Some Options Other Industries Do Not
As most in business know, it is one thing to get the work, and another to get paid in full and on time for the work. All too often, you will have a customer that received the goods or services it requested, never complained about the quality, but became silent when it was time to pay the invoice.
Good collections systems and processes will help minimize the impact of bad payers. But, sometimes that still is not enough. That is when you will need to turn to litigation to get your money.
Contractors, subcontractors, materials suppliers and design professionals involved in a construction project have a distinct advantage when it comes to legal remedies for collecting unpaid bills. This advantage is due to three Pennsylvania statutes:
- Pennsylvania Mechanic’s Lien Law
- Pennsylvania Contractor and Subcontractor Payment Act
- Pennsylvania Prompt Payment Act
Mechanic’s Lien Law
Most people involved in some manner with the construction industry have probably at least heard of the term Mechanic’s Lien. But when does it apply and how does it work?
Mechanic’s Lien Law rights are given to a general contractor, a subcontractor, a sub-subcontractor (usually a material supplier), and even a design professional that has a contract directly with the real property owner and provides contract administration services. A Mechanic’s Lien is a statutory remedy that allows these parties – known as claimants – to file a lien on real property (or a leasehold interest) within Pennsylvania for goods and services furnished in the erection, construction, alteration, or repair of an improvement to real property within Pennsylvania in connection with a private construction project.
A Mechanic’s Lien will be given the priority in the order it is filed. In other words, if you are the first to file a Mechanic’s Lien, you will be given the first lien on the real property. However, there are exceptions to this general rule. For example, county real estate tax liens will have priority over the Mechanic’s Lien, as well as construction loans, and purchase money mortgages. Once a Mechanic’s Lien is filed, and then perfected (served on the property owner), it may relate back to the commencement of the new construction, or the date materials were furnished, or possibly the date of its filing. This determination can be reached by reviewing certain factors relevant to the construction project.
Timing is critical when taking this action. A Mechanic’s Lien filing must occur within six months from when the work was “substantially” completed – not six months from when the project was completed. This nuance is extremely important because a filing made after six months from the date of substantial performance will most likely be stricken by the court if challenged by the property owner.
One of the drawbacks of a Mechanic’s Lien is that it limits the value of recovery to the amount actually owed and doesn’t allow for an amount that reflects the costs of a long-delayed payment. In other words, attorney’s fees, interest or penalties cannot be included. However, often the mere filing of a Mechanic’s Lien, in and of itself, may provide enough leverage to get voluntary payment.
When considering filing a Mechanic’s Lien, it is also very important to review all the statutory requirements – such as where to file, the formal notices, and the timing and deadlines – otherwise, it may result in a dismissal. The courts generally do not excuse technical missteps in these cases.
For further detail on Mechanic’s Lien Law, see my previous article, Mechanic’s Lien Law: A Legal Tool to Collect Construction Debt
Contractor and Subcontractor Payment Act
Referred to as CASPA, this statute applies to work performed on commercial construction contracts, and residential construction contracts in which a minimum of six units are simultaneously under construction in Pennsylvania.
This statute provides for adherence to a payment schedule among all parties in the contract. Unlike a Mechanic’s Lien, the Court or Arbitrator can award contractual attorneys’ fees and/or interest on payment amounts that are withheld – so long as the withholding isn’t a result of poor work performance. In addition, if money is found to be wrongfully withheld, attorney’s fees, interest, and, penalties may also be assessed pursuant to the statute.
Generally with CASPA, if a construction contract does not set forth a payment schedule or a timetable for when payments must be made, the owner must pay a contractor within 20 days after the end of the billing period or the receipt of an invoice, whichever is later. CASPA also directs a contractor to pay a subcontractor within 14 days after the contractor’s receipt of each progress or final payment request, or 14 days after the subcontractor’s invoice, whichever is later.
With respect to retainage, CASPA directs owners and contractors to pay contractors and subcontractors within 30 days after final acceptance of the work. But, CASPA does provide, in certain situations, a “pay-when-paid” provision that requires payment within 14 days after a contractor receives payment.
It should be carefully noted that if payments for deficiencies are found to be rightfully withheld, the party bringing the collection action under CASPA could be liable for paying the adverse party’s attorneys’ fees.
Prompt Payment Act
Referred to as PPA, this act specifically applies to contracts involving a government agency, the value of which exceeds $50,000. There are some exceptions – contracts with Philadelphia, the Philadelphia School District, PennDot, and distressed municipalities and school districts. Also, nonpayment as a result of a budget that has not been enacted, or when a local government unit doesn’t receive funding from federal or state agencies.
Similar to the CASPA, PPA involves a timetable for payments if a payment schedule is not outlined in the contract. The PPA may provide for attorney’s fees, and interest for payments that have been withheld in bad faith. If the government agency is withholding payment due to poor work performance, notices must be given to the contractor and subcontractor within 15 days of receipt of the payment application.
Generally, PPA directs the owner to pay the contractor or design professional within 45 days from the date of the payment application. The PPA also directs the contractor to make payment to the subcontractor within 14 days of receipt of the progress payment. It is also noteworthy that as part of the PPA, the contractor must disclose due dates for progress payments to a subcontractor before the subcontract is entered into by the parties.
Generally, with respect to retainage, the PPA directs payment upon substantial completion to be made within 45 days minus 1.5 times the cost to complete the punch list items.
Engaging an attorney who is experienced in these matters is highly recommended as these types of collections actions can be complicated and difficult. If you would like more information, or to discuss a potential construction collection, please contact me at [email protected] or 412-288-5017.
The information provided in this article is general information and not intended to provide legal advice for any specific situation.