Ah yes, retainage, what could represent your profit on a project and something frequently abused by owners on private and public projects alike.  Fortunately, Pennsylvania law offers public works contractors some protection from retainage abuse.  The Public Prompt Payment Act dictates when retainage can be withheld and when it must be released.  Agencies that fail to follow the Prompt Payment Act’s retainage rules can end up owing you interest, penalty, and attorneys fees.

The Prompt Payment Act’s Retainage Provisions

The Prompt Payment Act deals with retainage in two sections: 3921 and 3941.  Section 3921, 62 Pa.C.S.A. 3921, authorizes a government agency to withhold retainage.  But, in general, it limits the amount of retainage withheld to 10%, which is industry standard.  However, Section 3921 states that at 50% completion, the government agency must release 50% of the retainage withheld and retainage must be reduced to 5%.   There are a two caveats.  First, in order to receive the retainage reduction, there must not be a reason to hold retainage at 10%.  Second, where the Department of General Services (DGS) is the owner, retainage is capped at 6% and must be reduced to 3% at 50% completion.

Section 3941, 62 Pa.C.S.A. 3941, the project’s architect or engineer must make a final inspection of the work within 30 days of your final payment request.  If the work is found to be substantially complete, the government agency is required to make payment within forty-five days.  If the architect or engineer finds certain work is incomplete, it must identify that work in detail and the government agency may withhold 1.5 times the amount to complete that work.  The architect and engineer must also identify the estimated cost to complete the work.

The Prompt Payment Act’s Retainage Penalties

Under Section 3941(b), 10% interest is tacked on to retainage that is not paid within forty-five days of substantial completion.  Under Section 3935, if the government agency is found to have withheld retainage in bad faith, it may be liable for a additional interest at 1% per month and reasonable attorneys fees.

Payment of Retainage to Subcontractors

The Prompt Payment Act contains an important provision regarding payment of retainage to subcontractors.  Prime contractors are required to pay retainage to subcontractors within twenty days of receiving retainage from the owner.  Therefore, if you are a subcontractor and have not received at least a 50% retainage reduction and you know the project is more than 50% complete, you need to start asking questions of the prime contractor.

 

Despite the Pennsylvania Contractor and Subcontractor Payment Act’s threats of penalties of 1% interest per month, 1% penalty per month, and attorneys fees, the payment abuses it was intended to remedy remain a problem.  Generally, when an owner is threatened with a Payment Act claim they hardly run for their check books.  However, a recent unpublished opinion from the Superior Court, Scungio Borst & Assoc. v. Shurs Lane Developers, LLC, sets the stage to change everything.   There the Superior Court opens the door to holding officers and executives of owners entities personally liable for damages under CAPSA potentially making CASPA a nuclear device in a contractor’s arsenal in getting paid.

In that case, the Superior Court overturned summary judgment entered in favor of a individual member of an owner entity LLC on a contractors CASPA claim against him.  The plaintiff was a general contractor of a condominium project.  The defendants were the owner entity LLC and one of its 50% owners.  The general contractor brought claims for breach of contract and under CASPA seeking payment for over $1 million in unpaid change orders from defendants.  Specifically, the general contractor alleged that the individual had personally directed that the change order work be performed and that assured the general contractor that payment would be forth coming.  The trial court granted summary judgment in favor of the individual member of the owner entity and the general contractor appealed.

The general contractor argued that CASPA’s definition of owner made the individual member who authorized the change orders personally liable and the Superior Court agreed.  The Superior Court looked to the definition of an “owner” under CASPA.  Section 502 of CASPA defines an owner as “a person who has an interest in the real property that is improved and who ordered the improvements to be made [and] includes . . . agents of the owner acting with their authority.”  Accordingly, it remanded the case to the trial court for further proceedings.

Even though it is an unpublished opinion, and thus not binding law in Pennsylvania, the case is obviously significant.  Normally, individuals are not liable for corporate debts unless a plaintiffs can prevail under a theory of piercing the corporate veil. This is no easy task and usually requires proof that an individual used the corporate entity to commit fraud or that the corporate entity was a mere sham (i.e. it lacked capitalization and failed to follow corporate formalities.)  However, the Scungio case indicates that courts may be receptive to holding individual officers and executives personal liable under CASPA without showing any intent to defraud.

Holding a company potentially liable for the significant penalties is one thing.  However, when an individual’s personal assets are now at stake for those same penalties, owners facing CASPA litigation may think differently.