On June 12, Governor Tom Wolf signed into law amendments to Pennsylvania’s Contractor and Subcontractor Payment Act (CASPA), 73 P.S. § 501 et seq., which will become effective on October 10, 2018. The amendments strengthen contractors’ and subcontractors’ rights to payment by, among other things, (i) prohibiting waiver of CASPA protections by contract; (ii) empowering contractors and subcontractors to suspend work for nonpayment; (iii) entitling contractors and subcontractors to explanations in writing for the bases of withholdings; and (iv) permitting contractors and subcontractors to facilitate release of retainage before final acceptance of a project by posting a maintenance bond.

Knowledge and understanding of the amendments and their implications are critical to the success of your business and your project.

Waiver

The amendments begin by answering the oft-argued question of whether CASPA’s protections may be waived by contract and, if so, which particular provisions are waivable. Section 503(c) answers that question by explicitly prohibiting waiver of CASPA’s provisions by contract.

Suspension of Performance

The amendments explicitly empower contractors and subcontractors to suspend performance of work for nonpayment.  Section 505(e) provides that if payment is not received by a contractor, then the contractor has the right to “suspend performance of any work, without penalty, until payment is received according to the terms of the construction contract.” Additionally, a contractor may suspend performance of work if:

1. payment of an invoice has not been made within 20 days after the end of a billing period or delivery of the invoice, whichever is later;

2. 30 days have passed since the end of the billing period for which payment has not been received, and the contractor has notified the owner of nonpayment via email or mail; and

3. 30 calendar days have passed since the contractor’s provision of written notice, and the contractor has provided an additional 10 calendar days’ written notice to the owner, via certified mail, of its intention to suspend performance.

The amendments provide subcontractors with similar rights but require that subcontractors provide notice to the contractor, rather than the owner.

Withholding Payment

Section 506 is amended to provide that, except for withholdings under section 509 relating to retainage, if an owner withholds payment from a contractor for a deficiency item, (i) the amount withheld must be reasonable and (ii) the owner must notify the contractor of the deficiency and the explanation for the withholding within 14 days of receipt of the invoice. Failure to provide such an explanation constitutes a waiver of the basis for the withholding and requires payment in full for the invoiced amount. While an owner may withhold reasonable amounts for deficiencies, payment for items satisfactorily completed must be remitted. Section 511(b), relating to contractors’ and subcontractors’ withholdings, has been similarly revised.

Section 508 — relating to errors in documentation — also requires that the recipient of an allegedly incorrect or incomplete invoice provide notice of the deficiencies to the sender within 10 days of receipt. Once written notice has been received, the correct amount must be paid on the due date. The former provision, requiring the recipient of the incorrect invoice to pay the amount actually incurred on the date it is due, has been deleted.

Section 512 has been revised to provide that an amount is not “wrongfully withheld” if (i) it bears a reasonable relation to the value of a good faith claim and (ii) the claim holder complies with the obligations set out in sections 506 and 511 (relating to owners’ and contractors’ withholdings, respectively).

Retainage

Section 509(a.1) has also been added and provides that, upon substantial completion of its own scope of work, a contractor or subcontractor may facilitate release of retainage before final completion of the project by posting a maintenance bond for 120 percent of the amount of retainage withheld. If retainage is withheld for longer than 30 days after final acceptance of the work, the withholder is subject to the obligations set out in sections 506(b) and 511(b) (relating to owners’ and contractors’ withholdings, respectively).

Implications

These amendments level the construction playing field by empowering contractors and subcontractors to suspend performance of work for nonpayment without penalty, entitling them to explanations when payments are withheld, and authorizing them to seek payment of retainage before final completion of the project. These rights and entitlements may not be waived by contract so contractors will no longer be asked to waive CASPA’s protections at the negotiation table.

In order to perfect these new rights, however, contractors and subcontractors must satisfy the requirements set out in the amendments. To perfect suspension, contractors and subcontractors must follow closely the terms of their contracts and the notice timeline set out above. While the amendments remove much of the risk associated with suspending performance, contractors and subcontractors must follow the conditions of suspension closely and provide notice in the form and manner required. Failure to do so may prevent the contractor or subcontractor from exercising its suspension rights.

Owners, too, must provide the required notice and explanation when withholding payments. For example, failure to provide the notice of deficiencies in an invoice waives the owner’s right to withhold amounts in question. No longer will a discrepancy over a single item of work permit withholding of the entire invoiced amount, nor will withholdings be permitted without explanation.

The amendments provide new rights and requirements applicable to construction projects throughout Pennsylvania. Contact a member of Pepper Hamilton’s Construction Practice Group to ensure that you are not only complying with CASPA, but exercising all of the rights available to you under the Act.