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Kansas Fairness in Private Construction Contract Act Impacts Payment Obligations

Wednesday, July 18 2018 1:31 PM

By Nathaniel T. Martens

The Kansas Fairness in Private Construction Contract Act (“KFPCCA” or the “Act”) provides a variety of legal rights and duties for parties involved in commercial construction projects. Chief among those are the statutory provisions addressing when payment must be made either by a project owner to a general contractor or by a general contractor to any of its subcontractors.

Whether you own and operate a construction business as a general or subcontractor it’s important to understand the application of the KFPCCA. While this short article is not intended to be a comprehensive summary of the Act or to provide legal advice, it provides an overview of the payment related provisions which any general or subcontractor should be aware of.

KFPCCA Application

The KFPCCA has fairly broad application, applying to “construction” “contracts” defined as any contract or agreement which provides for any of the following:

Furnishing labor, equipment, material or supplies used or consumed for the design, construction, alteration, renovation, repair or maintenance of a building, structure, road, bridge, water line, sewer line, oil line, gas line, appurtenance or other improvement to real property, including any moving, demolition or excavation.

Payments under the KFPCCA

When it comes to payment obligations, a project owner must pay the general contractor within 30 days after receiving the contractor’s request for payment. If the owner fails to timely pay the general contractor, then the owner owes an additional 18% interest, which begins to accrue the day after payment was due. K.S.A. 16-1803.

The general contractor, however, is only entitled to interest on the undisputed portion of a bill not paid when due. If there is a dispute as to work performed or the amount due, the owner has the right to withhold payment on the disputed portions of the payment request. K.S.A. 16-1803. The owner’s right to withhold payment on disputed amounts does not however entitle the owner to do what many owners may threaten. That is, an owner cannot withhold ALL payment when a portion of that amount is undisputed. Knowing the statutory limitations on an owner’s ability to withhold payment may be particularly important to a general contractor who is confronted with a project owner who refuses to make any payment on a proper request when only a very small portion of that request is actually in dispute.

The obligation to pay for undisputed portions of a bill submitted on a commercial construction project applies equally between the general contractor and its subcontractors (and a subcontractor and any of its subs). The only difference is that the general contractor isn’t afforded as much time to issue payment to its subcontractors. A general contractor must pay its subcontractors within seven business days of receiving payment from the owner. Like an owner who disputes a portion of a payment request, a general contractor cannot withhold ALL payment owed to a subcontractor when a portion of that amount is undisputed. A general contractor who fails to make timely payment of an undisputed amount owes 18% interest on the amount due. K.S.A. 16-1803.

The general contractor’s obligations to make payment within seven business days of receiving payment from  the owner is consistent with a contract term generally referred to as a “pay-when-paid” clause. The Act does not, however, negate a general contractor’s ability to incorporate a “pay-if-paid” clause in its contract (but the Act does provide that a “pay-if-paid” provision is no defense to a subcontractor’s mechanic's lien or bond claim). The distinction between “pay-when-paid” and “pay-if-paid” clauses is discussed in Fleeson Gooing attorney Chuck Millsap’s Construction Law Update.

Importantly, a general contractor or subcontractor cannot be required to waive or release its right to file a mechanic’s lien in exchange for payment. In fact, K.S.A. 16-1803 provides that any contract term which “purports to waive, release or extinguish [lien rights]” is “against public policy and shall be void and unenforceable.” An owner or contractor making payment to a subcontractor can, however, require a waiver or release of lien rights in the amount being paid. K.S.A. 16-1803.

Additional rules apply to payment of retainage (money earned by a contractor or subcontractor but withheld to ensure proper performance) but are not the subject of this article.

Suspended Performance

Under the KFPCCA, if an undisputed payment is not made within seven business days after payment is due, a contractor or any of its subcontractors may suspend further performance until payment – including applicable interest – is made. K.S.A. 16-1805. The general or subcontractor cannot however suspend performance until it provides an additional seven business days’ written notice that it intends to suspend operations. K.S.A. 16-1805. In other words, the soonest a contractor or subcontractor can suspend performance is 14 business days following nonpayment.

Notably, the Act provides that the contract term for completion shall be extended appropriately and that the contractor who was forced to suspend operations due to nonpayment is even entitled to its reasonable costs of demobilization, delay, and remobilization. K.S.A. 16-1805.

Attorneys’ Fees

The KFPCCA also provides that the “prevailing” or successful party in any action to enforce the substantive provisions of the Act – including the statutory provisions discussed above – shall be awarded its costs and reasonable attorneys’ fees incurred in the action. K.S.A. 16-1806. And the right to recover costs and attorneys’ fees is applicable whether or not a dispute is brought through the court system or arbitration. K.S.A. 16-1806. The ability to recover attorneys’ fees and costs is of course a significant benefit to a party wronged under the provisions of the KFPCCA, as it may allow a contractor who has not been timely or fully paid to pursue full payment or applicable interest when the amount at issue may not otherwise have been economically feasible for attorney involvement.

Non-waivable

Finally, the rights and duties prescribed by the KFPCCA cannot be waived or varied under the terms of a contract. K.S.A. 16-1801. In other words, any attempt to contract-around the statutory requirements discussed above is unenforceable as a matter of law. Knowing that the Act cannot be varied by contract may be critically important to any contractor presented with a contract which claims to do just that.

The general information contained in this article is not a substitute for legal advice. For questions regarding the KFPCCA or legal issues related to its application or construction law in general, contact any of Fleeson Gooing's construction attorneys.

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