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Pennsylvania Prompt Pay Act, 62 Pa.C.S.A. § 3901, et seq.
Montgomery Bar Association - Continuing Legal Education
April 15, 2005
Presented by: Craig J. Fleischmann
Kraut Harris, P.C.1777 Sentry Parkway WestAbington Hall, Suite 200
Blue Bell, PA 19422(215) 542-4900
1. Applicability:
a. Applies to: All contracts, in excess of $50,000, entered into by a governmentagency (including State-aided institutions) through competitive sealed bidding orcompetitive sealed proposals
b. This includes local government agencies: Any county, city, borough, incorporatedtown, township, school district, vocational school district, county institution, localauthority or any joint or cooperative body of local government units or anyinstrumentality, authority or corporation thereof which has authority to enter into acontract
c. Exceptions:
i. Cities of the First Class -- i.e., Philadelphiaii. Philadelphia School Districtiii. PennDOT Contractsiv. Distressed municipalities or school districtsv. Non-payment caused by failure of the Commonwealth to enact a budget or
where Federal or State funding, or where failure to pay is caused by theState or Federal government fails to pay the local government unit
d. Conflicts with other laws: i. Doesn’t abrogate the Prevailing Wage Act in any wayii. Act cannot be a bar to Federal Aid, or conflict with laws or regulations
governing contract awarded pursuant to Federal law or regulationiii. A provision in the contract making it subject to the laws of another state or
requiring that any litigation, arbitration or other dispute resolution processon the contract occurs in another state shall be unenforceable
2. Payment provisions:
a. Act governs payment from Owner to Design Professional or Contractor, and fromContractor to Subcontractors only when the contract does not contain a termgoverning time for payment
b. Contracts between Contractors and Subcontractors are presumed to incorporatethe terms of the contract between Contractor and Owner
c. As between Owner and Design Professional or Contractor:- 45 days from payment application- late payments earn interest at the rate determined by the Secretary of
Revenue for interest payments on overdue taxes or the refund of taxes
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d. As between Contractor and Subcontractor:- Contractor obligated to disclose due dates for progress payments before
the subcontract is signed- Failure to disclose due dates requires payment to subcontractor in
accordance with the Act- 14 days from receipt of progress payment to Contractor- late payments earn interest at the rate determined by the Secretary of
Revenue for interest payments on overdue taxes or the refund of taxes
3. Withholding for Deficiency Items:
a. Payments can be withheld when notice is given to Contractor or Subcontractor ofdeficiency items; only payments relating to the deficiency item can be withheld
b. Owner must notify the Contractor of deficiency item within 15 days of thepayment application, unless otherwise specified in the contract
c. Contractor must notify the subcontractor within 15 days of its receipt of noticefrom the government agency
4. Retainage:
a. Contracts providing for retainage must contain a provision requiring the designprofessional to inspect within 30 days of the request for final inspection bycontractor and application for final payment
b. Retainage to contractor cannot exceed 10% up to 50% completion, when one halfmust be returned to contractor, the 5% thereafter
- Exception when the local government agency is the Department ofGeneral Services (6% to 50% complete; 3% thereafter).
Contractors must pay subs their earned share within 20 days of receipt
c. Upon substantial completion, payment due within 45 days, less 1.5 times the costto complete punch list items
d. Interest after substantial completioni. 6% on all contracts without retainage provisionsii. 10% on contracts with retainage provisionsiii. Except where bonds have been issued to finance the project, the rate of
interest on the bond or 10%, whichever is less, but in no event less thanthe legal rate of interest (6%)
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5. Penalties and Attorneys Fees:
a. Award of attorneys fees and interest (1% per month) may be awarded wherepayment was withheld in bad faith, defined in the Act as “arbitrary or vexatious”
b. Cummins v. Atlas Railroad Construction Co., 814 A.2d 742 (Pa.Super. 2002):
i. although a large number of claims of deficiency items and backcharges,and where contractor prevailed on all claims, because contractor admittedthat each individual claim was brought in good faith, argument that thecollective, systematic withholding of payment was arbitrary justifying anaward of penalty and attorneys fees failed
ii. left open the issue of whether this issue is for the jury to decide
6. Bar Against Contractor or its Surety Once Payment Made at Subcontractor Level
- Trumbull v. Boss Construction, Inc., 768 A.2d 368 (Pa.Cmwlth. 2001) - materialsupplier barred from claim on bond after subcontractor paid
7. Other Claims Against Sureties
- R.W. Sidley, Inc. v. United States Fidelity & Guaranty Company, 319 F.Supp.2d554 (W.D. Pa. 2004)
- Unless provided for in the payment bond, sureties are protected againstinterest claims under the Public Works Contractors Bond Law of 1967, 8P.S. § 191, et seq.
- The Prompt Pay Act does not permit claims for penalty and interestagainst the contractor’s surety
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Text of the Act
Pennsylvania Prompt Pay Act, 62 Pa.C.S.A. § 3901, et seq.
62 Pa.C.S.A. § 3901. Application andpurpose of chapter
(a) Application.--Except as otherwisespecifically provided in this chapter, thischapter applies to contracts entered into by agovernment agency through competitivesealed bidding or competitive sealedproposals.
(b) Purpose of chapter.--The purpose ofthis chapter is to establish a uniform andmandatory system governing publiccontracts to the extent of the requirementsset forth in this chapter and shall beconstrued to effectuate such purpose. Theprovisions of this chapter shall in no wayaffect the provisions of the act of August 15,1961 (P.L. 987, No. 442), known as thePennsylvania Prevailing Wage Act, nor theregulations promulgated under that act, norshall any requirements of this chapter affectany provisions of a contract to be awardedpursuant to any Federal law or regulationscontaining specific provisions which aredifferent from the public contractrequirements of this chapter.
62 Pa.C.S.A. § 3902. Definitions
The following words and phrases when usedin this chapter shall have the meanings givento them in this section unless the contextclearly indicates otherwise:
"Contract." A contract exceeding $50,000for construction as defined in section 103
(relating to definitions) , including heating1
or plumbing contracts but excludingDepartment of Transportation contractsunder section 301(c)(1) (relating toprocurement responsibility).
"Contractor." A person who enters into acontract with a government agency.
"Deficiency item." Work performed butwhich the design professional, the contractoror the inspector will not certify as beingcompleted according to the contract.
"Design professional." Persons performingprofessional services as defined in section901 (relating to definitions).
"Government agency." Includes any State-aided institutions.
"Inspector." The person authorized orengaged by the government agency toinspect the work performed and materialsfurnished pursuant to a contract to determinewhether the work completed is incompliance with the contract.
"Local government unit." Any county, city,borough, incorporated town, township,school district, vocational school district,county institution, local authority or anyjoint or cooperative body of localgovernment units or any instrumentality,authority or corporation thereof which has
References to these sections are to1
the Commonwealth Procurement Code, 62Pa.C.S.A. § 101. et seq.
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authority to enter into a contract.
"State-aided institution." Any institutionwhich receives State funds directly orindirectly for construction as defined insection 103 (relating to definitions).
"Subcontractor." A person who hascontracted to furnish labor or materials to orhas performed labor for a contractor oranother subcontractor in connection with acontract.
"Substantial completion." Constructionthat is sufficiently completed in accordancewith the contract and certified by thearchitect or engineer of the governmentagency, as modified by change orders agreedto by the parties, so that the project can beused, occupied or operated for its intendeduse. In no event shall a project be certified assubstantially complete until at least 90% ofthe work on the project is completed.
62 Pa.C.S.A. § 3911. Time for awardingcontract
(a) General rule.--In the case of a contractto be entered into by a government agencythrough competitive sealed bidding, thecontract shall be awarded to the lowestresponsible and responsive bidder within 60days of the bid opening, or all bids shall berejected except as otherwise provided in thissection.
(b) Delay.--If the award is delayed by therequired approval of another governmentagency, the sale of bonds or the award of agrant, the contract shall be awarded to thelowest responsible and responsive bidderwithin 120 days of the bid opening, or all
bids shall be rejected.
(c) Extensions.--Extensions of the date forthe award may be made by the mutualwritten consent of the government agencyand the lowest responsible and responsivebidder.
(d) List of bidders.--All governmentagencies shall be required to provide a list ofthe bidders and their bid amount on eachcontract within ten working days of the bidopening to interested parties for a fee to bedetermined by the government agency tocover the cost of developing such list. Thisrequirement shall not apply to thecontracting bodies of any politicalsubdivision or local authority which has theauthority to enter into a contract.
(e) Contract negotiation.--When theamount of the bid submitted by the lowestresponsive and responsible bidder for aDepartment of General Servicesconstruction contract exceeds the verifiablecontract allocation established by theDepartment of General Services for thecontract, the department may, prior toawarding the contract, negotiate the price,work items and time requirements for thecontract with the lowest responsive andresponsible bidder to bring the bid withinthe established contract allocation.
62 Pa.C.S.A. § 3912. Time for executingcontract
In the case of a contract entered into by agovernment agency through competitivesealed bidding, the contract shall beexecuted by the government agency within60 days of the date that the contract is
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awarded.
62 Pa.C.S.A. § 3913. Release of successfulbidder
Failure of the government agency to complywith the requirements of sections 3911(relating to time for awarding contract) and3912 (relating to time for executingcontract) shall, unless the successful bidderwaives the noncompliance by written noticeto the government agency, release thesuccessful bidder from any liability inrespect to its bid or contract and entitle allbidders to the immediate return of any bondsor security deposits posted in connectionwith the bid or contract.
62 Pa.C.S.A. § 3921. Retainage
(a) Contract provision.--A contract mayinclude a provision for the retainage of aportion of the amount due the contractor toinsure the proper performance of thecontract except that the sum withheld by thegovernment agency from the contractor shallnot exceed 10% of the amount due thecontractor until 50% of the contract iscompleted. When the contract is 50%completed, one-half of the amount retainedby the government agency shall be returnedto the contractor. However, the architect orengineer must approve the application forpayment. The contractor must be makingsatisfactory progress, and there must be nospecific cause for greater withholding. Thesum withheld by the government agencyfrom the contractor after the contract is 50%completed shall not exceed 5% of the valueof completed work based on monthlyprogress payment requests. In the event adispute arises between the government
agency and any prime contractor, whichdispute is based upon increased costsclaimed by one prime contractor occasionedby delays or other actions of another primecontractor, additional retainage in the sum ofone and one-half times the amount of anypossible liability may be withheld until suchtime as a final resolution is agreed to by allparties directly or indirectly involved unlessthe contractor causing the additional claimfurnishes a bond satisfactory to thegovernment agency to indemnify the agencyagainst the claim. All money retained by thegovernment agency may be withheld fromthe contractor until substantial completion ofthe contract.
(b) Department of General Services.--Notwithstanding subsection (a), when theDepartment of General Services is thegovernment agency, the contract mayinclude a provision for the retainage of aportion of the amount due the contractor toinsure the proper performance of thecontract except that the sum withheld by thedepartment for the contractor shall notexceed 6% of the then total estimates until50% of the contract is satisfactorilycompleted. The sum withheld by thedepartment from the contractor after thecontract is 50% satisfactorily completedshall not exceed 3% of the original contractamount.
62 Pa.C.S.A. § 3922. Payment of retainageto subcontractors
In the absence of sufficient reason, within 20days of the receipt of payment by thecontractor, the contractor shall pay allsubcontractors with which it has contractedtheir earned share of the payment the
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contractor received.
62 Pa.C.S.A. § 3931. Performance bycontractor or subcontractor
(a) Entitlement of contractor to payment.--Performance by a contractor inaccordance with the provisions of a contractshall entitle the contractor to payment by thegovernment agency.
(b) Entitlement of subcontractor topayment.--Performance by a subcontractorin accordance with the provisions of acontract shall entitle the subcontractor topayment from the contractor with whom thesubcontractor has contracted.
62 Pa.C.S.A. § 3932. Governmentagency's progress payment obligations
(a) Payments in accordance withcontract.--The government agency shall paythe contractor or design professional strictlyin accordance with the contract.
(b) Application for progress payments.--Ifthe contract does not contain a termgoverning the time for payment, thecontractor or design professional shall beentitled to make application for paymentfrom the government agency for progresspayments, and the government agency shallmake payment less the applicable retainageamount as authorized in section 3921(relating to retainage) to the contractor ordesign professional within 45 calendar daysof the date the application for payment isreceived.
(c) Interest on progress payments nottimely made.--Except as otherwise agreed
by the parties, if any progress payment lessthe applicable retainage amount asauthorized in section 3921 is not made to acontractor or design professional by the duedate established in the contract or insubsection (b), the government agency shallpay to the contractor or design professional,in addition to the amount due, interest on theamount due, and the interest shall becomputed at the rate determined by theSecretary of Revenue for interest paymentson overdue taxes or the refund of taxes asprovided in sections 806 and 806.1 of the actof April 9, 1929 (P.L. 343, No. 176), knownas The Fiscal Code.
(d) When interest payment not required.--In the event that the contract does notcontain a grace period and if a contractor ordesign professional is not paid by thepayment date required by subsection (b), nointerest penalty payment required under thissection shall be paid if payment is made onor before the 15th calendar day after thepayment date required under this subchapter.
62 Pa.C.S.A. § 3933. Contractors' andsubcontractors' payment obligations
(a) Performance by subcontractor entitlessubcontractor to payment.-- Performanceby a subcontractor in accordance with theprovisions of the contract shall entitle thesubcontractor to payment from the partywith whom the subcontractor has contracted.For purposes of this section, the contractbetween the contractor and subcontractor ispresumed to incorporate the terms of thecontract between the contractor and thegovernment agency.
(b) Disclosure of progress payment duedates.--A contractor or subcontractor shall
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disclose to a subcontractor, before asubcontract is executed, the due date forreceipt of progress payments from thegovernment agency. Notwithstanding anyother provisions of this subchapter, if acontractor or a subcontractor fails toaccurately disclose the due date to asubcontractor, the contractor orsubcontractor shall be obligated to pay thesubcontractor as though the due datesestablished in subsection (c) were met by thegovernment agency. This subsection shallnot apply to a change in due dates because ofconditions outside of the contractor'scontrol, including, but not limited to, designchanges, change orders or delays inconstruction due to weather conditions.
(c) Payment.--When a subcontractor hasperformed in accordance with the provisionsof the contract, a contractor shall pay to thesubcontractor, and each subcontractor shallin turn pay to its subcontractors, the full orproportional amount received for each suchsubcontractor's work and material, based onwork completed or services provided underthe subcontract, 14 days after receipt of aprogress payment. Payment shall be madeunder this section unless it is being withheldunder section 3934 (relating to withholdingof payment for good faith claims).
(d) Interest due when progress paymentnot timely.--If any progress payment is notmade to a subcontractor by the due dateestablished in the contract or in subsection(c), the contractor shall pay to thesubcontractor, in addition to the amount due,interest as computed in section 3932(c)(relating to government agency's progresspayment obligations).
(e) When interest payment not required.--
In the event that the contract does notcontain a grace period and if a subcontractoris not paid by the payment date required bysubsection (c), no interest penalty paymentrequired under this section shall be paid ifpayment is made on or before the 15thcalendar day after the payment date requiredunder this subchapter.
62 Pa.C.S.A. § 3934. Withholding ofpayment for good faith claims
(a) When government agency maywithhold payment.--The governmentagency may withhold payment for deficiencyitems according to terms of the contract. Thegovernment agency shall pay the contractoraccording to the provisions of thissubchapter for all other items which appearon the application for payment and havebeen satisfactorily completed. Thecontractor may withhold payment from anysubcontractor responsible for a deficiencyitem. The contractor shall pay anysubcontractor according to the provisions ofthis subchapter for any item which appearson the application for payment and has beensatisfactorily completed.
(b) Notification when payment withheldfor deficiency item.--If a governmentagency withholds payment from a contractorfor a deficiency item, it shall notify thecontractor of the deficiency item within thetime period specified in the contract or 15calendar days of the date that the applicationfor payment is received. If a contractorwithholds payment from a subcontractor fora deficiency item, it must notify thesubcontractor or supplier and thegovernment agency of the reason within 15calendar days of the date after receipt of the
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notice of the deficiency item from thegovernment agency.
62 Pa.C.S.A. § 3935. Penalty and attorneyfees
(a) Penalty.--If arbitration or a claim withthe Board of Claims or a court of competentjurisdiction is commenced to recoverpayment due under this subchapter and it isdetermined that the government agency,contractor or subcontractor has failed tocomply with the payment terms of thissubchapter, the arbitrator, the Board ofClaims or the court may award, in additionto all other damages due, a penalty equal to1% per month of the amount that waswithheld in bad faith. An amount shall bedeemed to have been withheld in bad faith tothe extent that the withholding was arbitraryor vexatious. An amount shall not bedeemed to have been withheld in bad faith tothe extent it was withheld pursuant tosection 3934 (relating to withholding ofpayment for good faith claims).
(b) Attorney fees.--Notwithstanding anyagreement to the contrary, the prevailingparty in any proceeding to recover anypayment under this subchapter may beawarded a reasonable attorney fee in anamount to be determined by the Board ofClaims, court or arbitrator, together withexpenses, if it is determined that thegovernment agency, contractor orsubcontractor acted in bad faith. An amountshall be deemed to have been withheld inbad faith to the extent that the withholdingwas arbitrary or vexatious.
62 Pa.C.S.A. § 3936. Contracts involvingFederal aid
If any provision of this chapter conflictswith a Federal statute or regulation or withconditions attached to the receipt of Federalaid, this chapter shall not operate to preventreceipt of the Federal aid in accordance withany Federal statute or regulation.
62 Pa.C.S.A. § 3937. Certain provisionsunenforceable
A provision in the contract making it subjectto the laws of another state or requiring thatany litigation, arbitration or other disputeresolution process on the contract occurs inanother state shall be unenforceable.
62 Pa.C.S.A. § 3938. Applicability
(a) Not applicable in certain situations.--
This subchapter shall not apply in thefollowing situations:
(1) Section 3932 (relating to governmentagency's progress payment obligations) shallnot apply when the Commonwealth agency'snonpayment on a particular project is causedby the failure of the General Assembly toenact a budget for the fiscal year of payment.
(2) Section 3932 shall not apply when alocal government unit's nonpayment on aparticular project is caused by failure of theFederal or State Government to pay fundsdue and payable to the local governmentunit.
(3) Section 3932 shall not apply when agovernment agency's nonpayment on aparticular project is caused by the failure ofthe General Assembly to enact an operating
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budget for the fiscal year of payment or acapital budget for the capital project or byfailure of the Federal, State or localgovernment to pay funds designated or to bedesignated for the specific project.
(4) Nothing in this subchapter shall beconstrued to require payment of interestpenalties by the Federal or StateGovernment if the local government unit isliable for the interest.
(b) Not applicable to following entities.--
This chapter shall not apply to any of thefollowing:
(1) A municipality determined to bedistressed under the act of July 10, 1987(P.L. 246, No. 47), known as theMunicipalities Financial Recovery Act.
(2) A school district which has beendetermined to be a distressed school districtunder section 691 of the act of March 10,1949 (P.L. 30, No. 14), known as the PublicSchool Code of 1949.
(3) A city of the first class that has enteredinto an intergovernmental cooperationagreement under the act of June 5, 1991(P.L. 9, No. 6), known as the PennsylvaniaIntergovernmental Cooperation AuthorityAct for Cities of the First Class, for so longas any deficit-reducing bonds issued by theauthority pursuant to section 301(b)(1) ofthat act are outstanding and payable.
(4) A corporate entity or school district asdefined in the PennsylvaniaIntergovernmental Cooperation AuthorityAct for Cities of the First Class.
(5) A transportation authority organized oroperating under 74 Pa.C.S. Ch. 17 (relatingto metropolitan transportation authorities).62 Pa.C.S.A. § 3939. Claims by innocentparties
(a) No obligation to third parties.--Thegovernment agency shall have no obligationto any third parties for any claim.
(b) Barred claims.--Once a contractor hasmade payment to the subcontractoraccording to the provisions of thissubchapter, future claims for paymentagainst the contractor or the contractor'ssurety by parties owed payment from thesubcontractor which has been paid shall bebarred.
62 Pa.C.S.A. § 3941. Substantial/finalpayment under contract
(a) Contract containing provision forretainage.--A contract containing aprovision for retainage as provided insection 3921 (relating to retainage) shallcontain a provision requiring the architect orengineer to make final inspection within 30days of receipt of the request of thecontractor for final inspection andapplication for final payment. If the work issubstantially completed, the architect orengineer shall issue a certificate ofcompletion and a final certificate forpayment, and the government agency shallmake payment in full within 45 days exceptas provided in section 3921, less only oneand one-half times the amount required tocomplete any then-remaining uncompletedminor items, which amount shall be certifiedby the architect or engineer and, uponreceipt by the government agency of any
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guarantee bonds which may be required, inaccordance with the contract, to insureproper workmanship for a designated periodof time. The certificate given by the architector engineer shall list in detail eachuncompleted item and a reasonable cost ofcompletion. Final payment of any amountwithheld for the completion of the minoritems shall be paid upon completion of theitems in the certificate of the engineer orarchitect.(b) Interest.--The final payment due thecontractor from the government agency aftersubstantial completion of the contract shallbear interest at a rate of 6% per annum forall contracts without provisions for retainageand at a rate of 10% per annum for allcontracts with provisions for retainage, theinterest to begin after the date that suchpayment becomes due and payable to thecontractor. However, where the governmentagency has issued bonds to finance theproject, interest shall be payable to thecontractor at the rate of interest of the bondissue or at the rate of 10% per annum,whichever is less, but in no event shall theinterest payable to the contractor be at a rateof interest less than the legal rate of interest.
62 Pa.C.S.A. § 3942. Arbitration
If a dispute should arise between thecontractor and the government agency overthe payment of retainages and final payment,then the dispute shall be arbitrated under theapplicable terms of the contract. If thecontract contains no provision forarbitration, then both parties may mutuallyagree to arbitrate the dispute under the rulesof the American Arbitration Association orin accordance with 42 Pa.C.S. Ch. 73(relating to arbitration). In any event, either
party shall have the right of appeal from anydecision and award as provided by law.
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