August 1, 2007
Too often construction subcontractors feel like they are at the mercy of general contractors when it comes to payment for their work. The trickle-down effect from a slow-paying owner can cause even more financial problems for subcontractors. However, there is some measure of protection afforded to subcontractors to ease the financial burden resulting from collection difficulties.
Depending on the type of project, state or federal laws exist to protect the rights of contractors, suppliers and laborers to be paid for their work. South Carolina law specifically protects the rights of trade contractors and suppliers to be paid from contract funds, establishes civil remedies and criminal penalties, and voids certain so-called "pay-if-paid" clauses in subcontracts.
The mechanics' lien is the primary and preferred legal tool for a subcontractor to use to assure payment for his work. However, mechanics' liens are not the only weapon in a subcontractor's arsenal.
Two state statutes provide other remedies under South Carolina state law.. First, the South Carolina Prompt Pay Act sets forth specific requirements for the time and manner of payment to both contractors and subcontractors, and establishes interest charges for late payment. The Prompt Payment Act does not apply to all types of construction, as residential and certain other types of projects are exempt.
The second statute, the Subcontractors' and Suppliers' Payment Protection Act, establishes if a subcontractor's work is within contract requirements he is entitled to payment. That Act further provides that payment by the owner to the contractor may not be a condition precedent to payment of lower-tier contractors and suppliers. South Carolina law also provides that subcontractors and suppliers have a first lien on the proceeds of payments made to general contractors. Importantly, criminal penalties attach to the contractor's failure to pay subcontractors, laborers or suppliers out of money received as provided by law.
These state statutes make it clear that project participants are entitled to payment as provided in their contracts. Under state law, the owner must pay undisputed amounts due within twenty-one days of receipt of the pay request. Upon receipt of payment, the contractor has seven days to pay his subcontractors. Each lower-tier subcontractor must likewise make payment within seven days of his receiving payment.
If payments are not made on time, contractors and subcontractors have a statutory interest claim pursuant to at the rate of one percent (1%) per month. However, no interest is due unless the person being charged interest has been notified of the statutory interest penalty at the time the request for payment is made.
Where the contractor or subcontractor fails to apply payments made to him as required by law, a lien attaches to those payment proceeds. This lien is different from a mechanics' lien. Instead of liening the real estate like a mechanics' lien, this lien attaches to the money itself.
Remedies provided by South Carolina law, whether in the form of mechanics' liens, prompt-pay requirements, interest, and contract limitations, provide a measure of protection to help trade contractors and suppliers manage their business risks.
Ron Tate focuses his practice on business and commercial law, including design and construction matters. He also has significant appellate experience before the South Carolina Court of Appeals. He serves as ethics counsel to the firm and has served on the South Carolina Bar's Ethics Advisory Committee.