Payments to Subcontractors

Judging by their success with the Oregon legislature, subcontractors have a strong lobby in Salem. Not only did they get the now infamous subcontractor listing bill passed last session, but in 1991 the so-called "Subcontractor Prompt Payment Act" was enacted. This almost incomprehensible bill (ORS 279.445) creates many issues for public agencies, but is rarely enforced.

Under the Subcontractor Prompt Payment Act, the Public Agency pays the contractor within 15 days after approval of the estimate and the contractor must pay its subcontractors within ten days of receiving its payment. If the contractor's payment is late, it must pay interest to the Subcontractor at three times the discount rate on the Federal Reserve Bank's 90 day commercial paper rate, not to exceed 30%. Recently, that was about 19.5% per annum. The interest payment is due 30 days after the date payment was received from the Agency.

Unfortunately, sometimes disputes arise and the contractor believes it has the right to pay a subcontractor less than the subcontractor wants to be paid. Under the Subcontractor Prompt Payment Act, if a contractor wants to backcharge a subcontractor, the following is required:

1. There must be a provision in the subcontract allowing the contractor to retain money due to a Good Faith Dispute. A Good Faith Dispute is defined as a documented dispute concerning: (a) unsatisfactory work progress; (b) defective work not remedied; (c) third party claims filed or reasonable evidence that claims will be filed; (d) failure to make timely payments for labor, equipment and materials; (d) damage to prime contractor; or, (f) reasonable evidence that the subcontract cannot be completed for the unpaid balance of the subcontract sum.
2. The contractor must give written notice to the subcontractor, with a copy to the Public Agency, specifying: (a) the amount to be withheld; (b) the causes for the withholding under the terms of the subcontract; and, (c) the remedial actions required in order for the subcontractor to receive the amounts withheld.
3. If the subcontract gives the contractor the right to backcharge, and if the contractor has given the required notice, then the contractor may withhold. If the subcontractor disputes the withholding, the contractor may not request payment from the Agency for the disputed portion of the work until the contractor and subcontractor settle their differences. If the contractor has received payments for the subcontractor's work, and has not yet paid the subcontractor, and then decides to backcharge the subcontractor, then the contractor must request a reduction in a future payment from the Agency until the dispute is resolved, or pay the interest penalty to the Agency for the money in the contractor's hands.

The Subcontractor is entitled to interest if the withholding is wrongful, or if the Contractor fails to follow the requirements allowing the withholding, regardless of the merit of the backcharge! The Agency cannot be made a party to a lawsuit by the subcontractor to recover disputed monies, nor can the subcontractor make a "pass through" claim against the Agency to collect the statutory penalty. However, the subcontractor should be able to file a lawsuit to force the Agency to follow the statute, withhold future progress payments from the Contractor, and collect the interest penalty.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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