Subcontractors’ Strongest Protections Don’t Always Apply

Subcontractors’ Strongest Protections Don’t Always Apply

By Philip J. Truax, Esq.

Several years ago, Ohio’s legislature passed a law to provide subcontractors and material suppliers with a formidable weapon to protect their payment rights – the Ohio Prompt Payment Act. ORC 4113.62 requires that subcontractors and suppliers be paid within 10 days of their customers being paid for their work or material. Generally speaking, any subcontractor or supplier that is not timely paid is entitled to 18% interest on its unpaid balance plus its legal fees spent pursuing the balance. This was and continues to be a clear public mandate that Ohio wants those companies actually furnishing the labor, equipment and material to be timely and fully paid (not to take anything away from self-performing general or prime contractors…)

Under ORC 4113.62(C), however, the protections of the Ohio Prompt Payment Act do not apply to most residential construction projects. In other words, if a subcontractor or material supplier furnishing labor, equipment, or material for a home construction project is not paid by the builder, who is actually paid for that subcontractor’s or supplier’s work, the unpaid sub or supplier has no claim for higher interest or legal fees (absent provisions in the parties’ contract providing those remedies). There may be any number of reasons why residential subcontractors do not receive the protections that commercial subcontractors receive, but frankly, I can’t think of one. The lack of prompt pay protection for residential subcontractors is perplexing, especially considering the safety net given to homeowners against subcontractor mechanic’s liens (i.e., subcontractors and suppliers have no mechanic’s lien rights on residential projects where the homeowner has paid the builder in full).

As a result, the only reasonable course of action any subcontractor or material supplier can take when performing work or furnishing materials at residential projects is to ensure that its controlling contract provides for convincing incentives for timely payment. Without that, an unpaid vendor is left with far weaker weapons to fight for payment. It may be time then to update those proposal forms to provide for the necessary protection in the event of non-payment.