Public Works Payment 101: Final Payment

Payment issues dominate the world of the public works contractor in Pennsylvania. When must progress payments be made? When can the government withhold payment? Is interest due on late payments? When is final payment due? How much retainage can be withheld and when must retainage be reduced and fully released?

Generally, payment obligations on public works contracts are set forth in Part II, Chapter 39, of the Pa. Procurement Code, 62 Pa.C.S. § 3901, et seq. These provisions control the public owner’s payment obligations, as well as contractors’ obligations for payment to its subcontractors.

This post is the first in a planned series on the payment requirements for public works contracts in Pennsylvania. Under the Commonwealth Procurement Code, 62 Pa.C.S. § 3941, the public owner’s obligations for final payment are strict.

When retainage is withheld, the public contract must require the architect or engineer to make final inspection within 30 days of receipt of the contractor’s request for final inspection and final payment. If the work is substantially completed, then

the architect or engineer shall issue a certificate of completion and a final certificate for payment, and the government agency shall make payment in full within 45 days except as provided in section 3921, less only one and one-half times the amount required to complete any then-remaining uncompleted minor items, which amount shall be certified by the architect or engineer and, upon receipt by the government agency of any guarantee bonds which may be required, in accordance with the contract, to insure proper workmanship for a designated period of time. [Emphasis added]

Under the terms of the section 3941, once the punch list items are completed, the public owner must make final payment of the amount that was withheld for completion of the punch list .

What does all of this mean in plain English?

Once “substantial completion” is achieved, (1) an inspection must be performed within 30 days after a contractor’s request, (2) the architect must issue a certificate of completion and for payment, (3) the architect must prepare a punch list and assign a value for the punch list items, and (4) payment, less one and a half times the punch list value, must be made to the contractor within 45 days. Final payment must then be made once all of the punch list items are completed.

If you are public works contractor, it is imperative that you request a final inspection after substantial completion. This request triggers the final payment obligations of the public owner. This request also triggers the public owner’s obligation to release retainage. Contrary to popular practice, a public owner is not permitted to hold 5% retainage (or more) until the literal final completion of the work.

If you need assistance on a public works payment issue, call or email me for a no-cost consultation. I’ll be happy to assist in anyway possible.

Bad Faith Finding Does Not Mandate Award Of Attorney Fees And 1% Penalty

If a public owner breaches its payment obligations to a public contractor and acts in bad faith in doing so, is the public contractor automatically entitled to an award of its attorney’s fees and a 1% penalty under section 3935 of the Procurement Code?

In a recently published opinion, the Supreme Court of Pennsylvania has ruled that such an award is discretionary, not automatic, reversing a 2014 Commonwealth Court decision which had held that a bad faith finding entitled the contractor to recover its attorney’s fees and the 1% penalty. Read more

Posted on August 17, 2016 by Christopher I. McCabe, Esq. in Court Decisions, Procurement Code, Public Works Payment Rules Comments Off

Contractor & Subcontractor Payment Act Does Not Apply To Public Projects In Pennsylvania

In a recent decision, the Supreme Court of Pennsylvania has held that the Pa. Contractor and Subcontractor Payment Act (“CASPA”) does not apply to a construction project where the owner is a governmental entity. CASPA is a Pennsylvania statute governing payments to contractors and subcontractors on construction projects located in Pennsylvania. CASPA typically applies to private development projects, whereas the Pa. Procurement Code’s Prompt Pay Schedules apply to state or local public works projects.

Posted on September 3, 2015 by Christopher I. McCabe, Esq. in Court Decisions, Public Works Payment Rules Comments Off

Commonwealth Court Again Holds That Penalty Award Is Mandatory On Finding Of Bad Faith

[NOTE: The Commonwealth Court decision reported in this post has been overruled by the Supreme Court. See my new post on the Supreme Court’s July 2016 ruling that a finding of bad faith does not mandate an award of fees and penalties.]

In a recent, unpublished opinion, in the case of Klipper Construction Associates, Inc. v. Warwick Township Water and Sewer Authority, the Commonwealth Court of Pennsylvania affirmed its recent holding in A. Scott Enterprises, Inc. v. City of Allentown (Oct. 2014), and has held again that a finding of bad faith on the part of a public agency in withholding payment from a public contractor mandates the award of a penalty. This is from the Court’s decision:

Contractor’s assertion that the trial court erred in failing to award any penalty is correct. As noted above, a finding of bad faith requires the trial court to make a penalty award under Section 3935(a) of the Prompt Pay Act. A. Scott Enterprises, Inc., __ A.3d at __, 2014 WL 5335358 at *7. We must therefore reverse the trial court on this issue.

What is “bad faith”? Section 3935(a) of the Procurement Code has this to say about bad faith:

An amount shall be deemed to have been withheld in bad faith to the extent that the withholding was arbitrary or vexatious. An amount shall not be deemed to have been withheld in bad faith to the extent it was withheld pursuant to section 3934 (relating to withholding of payment for good faith claims).

The takeaway? If you are a public contractor denied payment by a public entity and can show bad faith – arbitrary or vexatious conduct – on the part of the public entity, then you will be awarded a penalty which might be as high as 1% per month on the amount owed. If you are the public entity and are withholding payment from the contractor, then you must fully comply with section 3934 of the Procurement Code to avoid a finding of bad faith.

The Commonwealth Court decision can be found here. My earlier post on the A. Scott Enterprises case can be found here.

Posted on December 31, 2014 by Christopher I. McCabe, Esq. in Court Decisions, Procurement Code, Public Works Payment Rules Comments Off

Payment Rights, Obligations and Remedies on Pennsylvania Public Works Projects

On Thursday, November 6, 2014, I gave a dinner presentation to the Southeast District meeting of the National Utility Contractors Association (Pennsylvania). The topic was “Payment Rights, Obligations and Remedies on Public Works Projects.” If you would like a copy of the PowerPoint presentation, send me an email, and I’ll be happy to send it along.

Posted on November 14, 2014 by Christopher I. McCabe, Esq. in Public Works Payment Rules Comments Off

Commonwealth Court Rules That Award Of Fees And Penalty Is Mandatory On Finding Of Bad Faith

In a recently published opinion, the Commonwealth Court has held that a finding of bad faith by a public entity in refusing to make payment to a public contractor mandates the award of attorney’s fees and the statutory penalty of 1% per month.

In 2009, the City of Allentown (Allentown) awarded a road paving contract to A. Scott Enterprises (Scott). After mobilization, the job was suspended when a pile of contaminated dirt was discovered at the job site. Scott resumed some of its work and then left the job site while the parties negotiated Scott’s costs. The parties were unable to agree on payment for the additional costs to deal with the job suspension and the contaminated soil.

Scott then filed suit to recover its losses on the project, and was awarded damages of $927,299. The jury also found that Allentown breached the contract and acted in bad faith in refusing to make payment to Scott for its contract damages and suspension costs. However, despite the finding of bad faith, the trial court refused to award Scott attorney’s fees, the statutory penalty of 1% per month, and pre- and post-judgment interest. Scott appealed to the Commonwealth Court.

On appeal, Allentown argued that an award of fees and penalties was discretionary with the trial court. The Commonwealth Court rejected Allentown’s arguments, and held that the jury finding of bad faith mandated an award of fees and penalties to Scott:

The purpose of the Procurement Code is to “level the playing field” between government agencies and contractors. See Pietrini Corp. v. Agate Construction Co., 2006 PA Super. 140, 901 A.2d 1050, 1055 (Pa. Super. 2006). It advances this goal by requiring a government agency that has acted in bad faith to pay the contractor’s legal costs, as well as an interest penalty. Otherwise, the finding of bad faith is a meaningless exercise with no consequence for the government agency found to have acted in bad faith. We conclude that Section 3935 of the Procurement Code requires the imposition of attorney’s fees and the statutory penalty upon a jury’s finding of bad faith. See City of Independence v. Kerr Construction Paving Company, Inc., 957 S.W.2d 315, 321-23 (Mo. Ct. App. 1997) (holding that Missouri’s procurement code’s use of “may” regarding penalty interest and attorney’s fees means “shall” and upon finding of bad faith by jury, trial court must award such damages, even though the extent of damages is a matter for the discretion of trial judge).

On the question of when the public agency must make payment to the contractor, the Commonwealth Court had this to say:

There was conflicting evidence on the exact amount the City owed Contractor. However, the City had an obligation to make a good faith effort to pay for Contractor’s suspension costs and to pay those invoices it did not challenge. 62 Pa. C.S. §3932. If the City disputed the amount of a suspension invoice, it was required to so notify Contractor, withhold the disputed amount and pay the remainder of the invoices. Instead the City paid nothing.

While the Commonwealth Court held that an award of fees and penalties was mandatory, the amount to award is within the trial court’s discretion. The case was remanded to the trial court for a hearing to determine the award of reasonable attorney’s fees.

The takeaway from this decision is that public agencies have a clear duty to determine what is owed to a contractor and to pay that amount. They cannot simply throw up their hands and refuse to make any payment because there is a dispute over some items of work. The Commonwealth Court’s holding strengthens the hand of public contractors in Pennsylvania, and puts public agencies on notice that the Procurement Code has real teeth and that they will be held accountable for bad faith conduct in refusing to make proper and timely payment to their contractors

The Commonwealth Court’s opinion can be found here.