Important Amendments to the Pennsylvania CASPA: Non-Waiver, Right to Stop Work, Defective Work, and Retainage

On June 12, 2018, Pennsylvania Governor Tom Wolf signed into law House Bill 566, which includes several amendments to the Contractor and Subcontractor Payment Act, 73 P.S. § 501, et seq. (CASPA). The amendments take effect on October 10, 2018.

CASPA was enacted in 1994 to serve as a tool for contractors and subcontractors to help facilitate timely payment for services, labor, materials, and equipment provided to commercial and certain residential construction projects. The statute sets forth payment procedures and timetables, and it defines what constitutes a wrongful withholding of payment for completed work. Violations of CASPA have resulted in significant judgments for contract balances due, together with statutory interest at 1% per month, penalties at 1% per month, and attorneys’ fees and costs. It is clear that CASPA and ensuing court rulings have helped contractors be paid in many instances. However, contractors, subcontractors, and suppliers still find it challenging to obtain payment and will look to the latest amendments to improve the flow of money on construction projects subject to CASPA.

Suspension of Work Due to Nonpayment

Pursuant to the amendments, if payment is not provided by an owner to a contractor or by a contractor to a subcontractor, the unpaid contractor or subcontractor may suspend performance of its work without penalty until the overdue payment is received. In order to exercise its right to suspend work, the unpaid contractor or subcontractor must comply with written notice provisions and waiting periods. Specifically, with respect to contractors working directly for owners, if the contractor has not been paid for work performed and 30 calendar days have passed since the end of the billing cycle, the contractor may provide written notice of nonpayment to the owner or owner’s representative. If another thirty 30 elapse and payment has not yet been made, the contractor may serve a second written notice of nonpayment via certified mail upon the owner or the owner’s representative. Then, if ten more days pass without payment, the contractor may suspend work on the project without penalty.
Similarly, if the subcontractor has not been paid for its work and 30 days have elapsed since the end of the billing cycle, the subcontractor may serve an initial written notice of nonpayment to the contractor. Following another 30 calendar days, if payment remains outstanding, the unpaid subcontractor may serve written notice of nonpayment via certified mail on the owner or the owner’s representative. After a final ten day waiting period, the subcontractor may suspend work without penalty.

Written Notice of Deficiency Required

The new right for contractors and subcontractors to stop work does not override the ability of an owner or a contractor to withhold payment for a good-faith reason – e.g., where there are deficiency items with respect to the work. But, the amendments require the issuance of a written explanation by the contractor or subcontractor regarding a good-faith reason for withholding payment. The party withholding payment must notify the party seeking payment of the deficiency item and state that the invoice (or a portion of it) will not be paid.
With respect to an owner withholding payment, the written notice must be sent to the contractor within 14 calendar days of receipt of the contractor’s invoice containing the deficiency item. With respect to a contractor or subcontractor that elects to withhold payment, the written notice must be sent to the party that submitted the invoice, as well as the owner of the project, within 14 calendar days after receipt of the notice of deficiency. If a party withholds payment for a deficiency item, the owner, contractor, or subcontractor must, nonetheless, remit payment for the work that has been satisfactorily completed and is not in dispute.

Importantly, the new law specifically states that a party’s failure to comply with the written notice requirements results in waiver of the basis to withhold payment. Thus, if the written notice timetables are not met, the party disputing the work must pay the invoice in full or face exposure to CASPA damages (interest, attorneys’ fees/costs).
Moreover, the recipient of an incorrect invoice must notify the sender of the deficiency within ten days. However, an invoice error is not an excuse for nonpayment; the recipient remains obligated to pay the correct amount on the original due date or risk an improper withholding and penalties under CASPA.

Release of Retainage with Maintenance Bond

Under the amendments, contractors and subcontractors will be able to secure the release of retainage prior to final completion of a project. Rather than waiting until final completion, contractors and subcontractors may post a maintenance bond with an approved surety for 120% of the retainage amount being withheld. The posting of the bond obligates the owner or contractor to release the retainage where there has not been notice of a deficiency item. Further, absent a bond, unless written notice of deficient work is properly and timely provided, retainage may not be withheld more than 30 days after final acceptance of the work. A violating party is liable for CASPA damages.

Non-Waiver

The amendments include a non-waiver provision, which prohibits any provisions in the statute from being waived, even if the parties agreed in writing to do so. In other words, the parties may not “contract around” the CASPA protections provided to contractors and subcontractors.

Looking Ahead

The CASPA amendments take effect on October 10, 2018. The amendments will impact owners, contractors, and subcontractors on all Pennsylvania commercial construction projects and some residential projects. Given the significant impact of the amendments on your rights and responsibilities, we highly recommend that companies consult with counsel to best equip themselves to deal with these changes in the law.