Telephone: 724-787-4451

Getting Paid on a Construction Project: The Right Tools Can Make All the Difference Part 2

  June 2018 / Vol 8 Issue 4

Getting Paid on a Construction Project: The Right Tools Can Make All the Difference Part 2:  Bonds and Prommpt Payment Statutes
By: Steven P. Engel, Esquire, Blumling & Gusky, LLP

 

In this two-part article, we have attempted to identify some tools that are available to contractors, subcontractors and suppliers who are facing a payment dispute on a construction project. In last month’s issue, we discussed mechanic’s liens and demonstrated why they can be a powerful and effective part of your collection strategy. This article will discuss two other tools, payment bonds and Prompt Payment Statutes, and show why they can be useful and effective tools for an unpaid contractor or supplier who is looking to secure payment.

Bond Claims – Third Party Guarantees that Can Provide an Additional Source of Potential Recovery

Cautious owners and producers sometimes require prime or general contractors on construction projects to provide payment bonds. Payment bonds guarantee the prime contractor or “principal’s” payment to those that supply labor or material under a construction contract. Under appropriate circumstances, an unpaid subcontractor or supplier can secure payment from these types of bonds when the principal/contractor is insolvent or refuses to pay without a reasonable or legitimate excuse.”

Significantly, the sureties that issue these payment bonds typically require the management and/or owners of a principal/prime contractor and their spouses to sign agreements of indemnity. These agreements require the owners/management to indemnify or reimburse the surety for any payments made under the bond. Management’s exposure to potential personal liability can therefore provide an additional incentive for a contractor to pay the amounts that are owed.

In addition, general contractors are required to supply payment and performance bonds before they can perform work on most public and many large commercial construction projects. The ability to supply these bonds or “bonding capacity” is crucial to a contractor’s eligibility to bid and perform work on most public and many commercial projects. Claims against a bond limit or have a negative effect on bonding capacity. This effect on a contractor’s bonding capacity can add an additional incentive for a defaulting contractor to settle.

Does this mean a claim against a payment bond is a surefire way to receive immediate payment on a disputed claim? Unfortunately, the answer is no. Sureties, like insurance companies, have claims departments that must complete an investigation of any claim against a bond before any claim can be paid. These investigations take time. In addition, if the principal disputes the claim, the surety will typically deny the claim and tender the defense of the claim to the contractor. If this occurs, the subcontractor or supplier must pursue a lawsuit against the surety, oftentimes in federal court.

Does this mean that a bond claim is ineffective or not worth pursuing as part of your collection strategy? The answer is no. When you are involved in a payment dispute, there is always the risk that the withholding contractor is insolvent. If a non-paying contractor is insolvent, it could file a bankruptcy petition or be forced into bankruptcy through a petition by one of its other creditors. Depending on the number of other creditors, the possibility of a quick recovery or full recovery in a bankruptcy proceeding is typically remote, particularly if the debtor is unsecured or if there are other creditors whose liens have priority. A contractor could also be “judgment proof,” meaning it doesn’t have assets available to recover against even if you obtain a judgment against it. In these situations, a bond claim can be beneficial if not crucial alternative source of recovery.

Finally, it is also important to remember that the terms of a bond generally determine a claimant’s right to recover. Bonds often include specific notice requirements and dictate what type of proof is required to recover under the bond. They also typically identify the types and amounts of recovery that can be made under that bond. It is therefore important to obtain a copy of and carefully read any bond before asserting a claim.

Prompt Payment Statutes – An Additional Tool that is Available in Some States that Can Help Contractors and Subcontractors Get Paid

Another often-overlooked tool that is available to an unpaid contractor, subcontractor or supplier are State Prompt Payment Statutes. These statutes impose additional statutory obligations on owners/contractors that can serve as another proverbial hammer to hold over the head of non-paying owners and contractors.

For example, Pennsylvania has enacted its own Prompt Payment Act, which is known as the “Contractor and Subcontractor Payment Act”, 73 P.S. §§ 501 et seq. (“CSPA”). CSPA sets specific deadlines for an owner’s payment to a contractor, providing that “except as otherwise agreed by the parties, payment of interim and final invoices shall be due from owner within …20 days after delivery of the invoice [to the Owner]”(i.) CSPA also provides that if payment by the owner to the contractor is delayed, the owner shall pay the contractor interest at the rate 1% per month or fraction of a month or 12% per annum on the balance that is at the time due and owing(ii).

CSPA also establishes deadlines for payments to subcontractors. Under CSPA, a subcontractor is entitled to payment from a contractor within fourteen (14) days from the latter of the date when the contractor receives an invoice from the subcontractor or the date the contractor receives payment from the owner for the subcontractor’s work(iii). With regard to the timing of this payment, CSPA also presumes that an owner makes payment to a contractor if the contractor does not disclose the payment dates under its contract with the owner before a subcontract is executed(iv). If the payment to a subcontractor is delayed, CSPA provides that the contractor “shall pay the subcontractor interest, at the rate of 1% per month or fraction of a month on the balance that is at the time due and owing(v).”

CSPA also provides for the mandatory award of a reasonable attorney fee if a contractor or subcontractor is forced to commence arbitration or litigation to recover the amounts duevi. In addition, CSPA provides that the claiming contractor or subcontractor shall be awarded an additional penalty in the amount of 1% per month of the amount if payment is was wrongfully withheld or if it is determined that an owner or contractor failed to comply with the payment obligations under the Act and forced the contractor or subcontractor to commence arbitration or litigation(vii).

The Ohio Legislature has enacted a similar Prompt Pay Statute. This statute, which is contained at Ohio Rev. Code §4113.61, provides that “[a] contractor(viii) must pay a subcontractor on a payment application within 10 days of the contractor receiving funds from the owner.” Similarly, the Act requires subcontractors to release payment to lower-tier subcontractors and suppliers within 10-days of having received payment from a contractor. If the contractor or subcontractor fails to comply with these provisions, the contractor or subcontractor must pay the lower tier subcontractor or supplier, “[i]nterest in the amount of eighteen per cent per annum(ix).” In addition, Ohio’s Prompt Pay Act requires the court to award reasonable attorney’s fees and court costs if the court finds that a contractor, subcontractor has not made payment in compliance with the Act(i).

As these previous paragraphs demonstrate, Prompt Payment Statues can be useful tools to the unpaid contractor, subcontractor or supplier. The threat or potential exposure to an award of attorney fees and/or the award of additional mandatory interest can be a useful tool that provides additional incentive to an owner or contractor to release overdue payments. Moreover, even if the risk of exposure to an award of legal costs and added interest does not accomplish the goal of generating the quick release of the withheld amounts, these Acts still can be useful in that they provide a vehicle through which an unpaid contractor, subcontractor or supplier can offset the cost of pursuing litigation. The author therefore recommends that unpaid contractors, subcontractors and suppliers research and consider the inclusion of a claim under these types of statutes in any lawsuit or arbitration proceeding that is filed that seeks to recover overdue amounts that are owed in connection with a construction project.

 

Mr. Engel is a partner at Blumling & Gusky, LLP, and is a member of the firm’s Construction and Surety Law Group. His practice is concentrated in construction claims and litigation, where he has represented contractors, subcontractors, suppliers and engineers in connection with mechanics liens, arbitration proceedings and in litigation in various state and federal courts, including courts in Pennsylvania, Ohio and West Virginia. He can be reached at 412-227-2500 or SEngel@bglaw-llp.com.

 

i. 73 P.S. §505(c).
ii. 73 P.S. §505(d).
iii. 73 P.S. §507(c).
iv. 73 P.S. §507(b).
v. 73 P.S. §507(d).
vi. 73 P.S. §512(b).
vii. 73 P.S. §512(a).
viii. Ohio Rev. Code §4113.61(A)(2).
ix. Ohio Rev. Code §4113.61(A)(1) and (2).
x. Ohio Rev. Code §4113.61(B)(1) and (3).

Visit Us On FacebookVisit Us On Twitter