View the online version at http://us.practicallaw.com/w-001-4209Construction Laws and Customs: OhioJEFFREY R. APPELBAUM, DANIEL M. HAYMOND, BILL THRUSH, AND ERIN LUKE,THOMPSON HINE, WITH PRACTICAL LAW REAL ESTATEA Q&A guide to construction projects in Ohio.This Q&A addresses state law and customrelating to public and private constructionprojects, including prompt payment laws,retainage, project delivery systems, contractforms, and commonly negotiated terms,warranties, and licensing requirements forconstruction professionals. It also addressespayment and performance bonds, includingany "Little Miller Acts," constructionlitigation statutes of limitations and pleadingrequirements, and the enforceability ofspecific clauses, such as liquidated damages,limitations on liability, and no-damagesfor-delay. Answers to questions can becompared across a number of jurisdictions(see Construction Laws and Customs:State Q&A Tool (http://us.practicallaw.com/w-001-4485)).PROMPT PAYMENT ACTS AND RETAINAGEThe following Ohio statutes govern times for payment on publiclyowned or financed projects: Sections 153.12 to 153.14 of the Ohio Revised Code (payments toprime contractors). Section 4113.61 of the Ohio Revised Code (payments tosubcontractors). Section 5525.19 of the Ohio Revised Code (Department ofTransportation projects).PAYMENTS BY OWNERSContracts for the establishment, construction, reconstruction,improvement, maintenance, or repair of a state highway requirepayment by the owner to the contractor at least once a month as thework progresses, based on estimates made by the applicable DistrictDeputy of Transportation in charge of the improvement and afterapproval by the Director of the Ohio Department of Transportation(Ohio Rev. Code Ann. § 5525.19).On all other public contracts, payment is due from the owner "at thetime named in the contract for payment." The payment is made usingan owner-approved estimate of the labor performed and materialfurnished under the contract, based on the actual measurementof the labor and materials. (Ohio Rev. Code Ann. § 153.13.) Thecontractor is required to prepare and submit a schedule of values,which must be approved by the architect or engineer, and is usedto make partial payments (Ohio Rev. Code Ann. § 153.12). Paymenton approved estimates filed with the owner are required to be madewithin 30 days (Ohio Rev. Code Ann. § 153.14).PAYMENT BY PRIME CONTRACTORS Payments by prime contractors to subcontractors?Ohio has a Prompt Payment Act (PPA) that requires a contractorto make payments to a subcontractor on a public or privateconstruction project. If a contractor receives an application or requestfor payment, or an invoice for materials from a subcontractor, whichthe contractor can include in its application, request, or invoice to theowner, the contractor must, within ten calendar days after receipt ofpayment from the owner, pay: Penalties for failure to comply with requirements of the statute? The subcontractor an amount equal to the percentage of1. Does your state have any statutes governing the timing ofpayments to contractors or subcontractors on publicly ownedor financed construction projects? If so, what do those statutesrequire regarding: Payments by owners to prime contractors? A contractor's right to stop work for failure to receive payment? 2016 Thomson Reuters. All rights reserved.completion of the subcontractor's contract allowed by the ownerfor the amount of work or labor performed.
Construction Laws and Customs: Ohio The material supplier an amount equal to all or that portion of theinvoice for materials furnished by the supplier.(Ohio Rev. Code Ann. § 4113.61(A)(1).)Within ten days of receipt of payment from the contractor, asubcontractor must make payments to: Lower-tier subcontractors in an amount equal to the percentageof completion of the lower-tier subcontractor's contract allowed bythe owner for the amount of labor or work performed. Lower-tier material suppliers in an amount for furnished materials.(Ohio Rev. Code Ann. § 4113.61(A)(2).)Prime contractors may withhold amounts "necessary to resolvedisputed claims involving the work or labor performed" by asubcontractor (Ohio Rev. Code Ann. § 4113.61(A)(1)). However, inMasiongale Electrical-Mechanical, Inc. v. Construction One, Inc., theOhio Supreme Court imposed limits on the type of amounts thatmay properly be withheld from payments to lower-tier contractors(806 N.E.2d 148 (Ohio 2004) (finding that amount withheld forbonding off a mechanic's lien and anticipated attorneys' fees basedon a party's violation of "no lien" and forum selection provisions wereprocedural in nature and therefore did not meet the Prompt PaymentAct's definition of withholding amounts related to "disputed claimsinvolving the work or labor performed").PENALTIES FOR FAILURE TO COMPLYInterest accrues on amounts unpaid by the public owner within 30days of the filing of an approved estimate by the contractor. Therate of interest is the average of the prime rate established at thecommercial banks in the city closest to the construction project with apopulation that is over 100,000. (Ohio Rev. Code Ann. § 153.14.)Under the PPA, subcontractors or suppliers are entitled to interestat a rate of 18% per annum beginning on the 11th day following thecontractor's receipt of payment from the owner and ending on thedate of full payment of the payment due plus interest (Ohio Rev.Code Ann. § 4113.61(A)(1)). Ohio courts also have discretion underthe PPA to award reasonable attorneys' fees and court costs, unlessthe court determines that the payment of attorneys' fees would be"inequitable" (Ohio Rev. Code Ann. § 4113.61(B)(1), (3)). In exercisingits discretion, the court must consider all the relevant factorsincluding but not limited to: The presence or absence of good-faith allegations or defensesasserted by the parties. The proportion of the amount of recovery related to the amountdemanded. The nature of the services rendered and the time spent inrendering the service.(Ohio Rev. Code Ann. § 4113.61(B)(2).)RIGHT TO STOP WORKOhio's public payment statutes do not specifically address: A prime contractor's right to stop work if a public owner does not A subcontractor's right to stop work if a prime contractor does notmake the required payments.2. Does your state have any statutes governing the timing ofpayments to contractors or subcontractors on privately ownedconstruction projects? If so, what do those statutes requireregarding: Payments by owners to prime contractors? Payments by prime contractors to subcontractors? Penalties for failure to comply with the requirements of thestatute? A contractor's right to stop work for failure to receive payment?Section 4113.61 of the Ohio Revised Code governs times for paymentto subcontractors on privately or publicly owned or financed projects.PAYMENTS BY OWNERSOhio does not have any statutes governing the timing of payments toprime contractors on privately owned construction projects. However,Ohio has a general interest statute that imposes interest on any unpaidamounts from when those amounts became "due and payable" underany verbal or written contract (Ohio Rev. Code Ann. § 1343.03(A)).PAYMENT BY PRIME CONTRACTORSOhio has a Prompt Payment Act (PPA) requiring a contractor to makepayments to a subcontractor on a public or private constructionproject (see Question 1: Payment by Prime Contractors).PENALTIES FOR FAILURE TO COMPLYUnder Ohio's general interest statute, the contractor is entitledto simple interest at the federal short-term per annum rate as ofOctober 15th of the previous calendar year, rounded to the nearestwhole number percent, unless a written contract provides a differentrate of interest. The creditor is entitled to the interest rate provided inthe contract. (Ohio Rev. Code Ann. §§ 1343.03(A) and 5703.47.)For information about penalties for a contractor's failure to complywith the PPA, see Question 1: Penalties for Failure to Comply.RIGHT TO STOP WORKThere are no Ohio statutes that specifically address: A prime contractor's right to stop work if a private owner does notmake timely payments. A subcontractor's right to stop work if a prime contractor does notmake the required payments under the PPA.3. If your state does not have a prompt payment act, what is thecustom and practice regarding: Timing of payments by owners to prime contractors? Timing of payment by prime contractors to subcontractors? Payment of interest on late payments? A contractor's right to stop work for failure to receive a payment?make the required payments.2 2016 Thomson Reuters. All rights reserved.
Construction Laws and Customs: OhioOhio has a prompt payment act that sets out the requirements forpayments and interest on:The following Ohio statutes regulate the withholding of retainage onpublicly owned or financed construction projects: Public construction projects to prime contractors. Section 153.12 of the Ohio Revised Code (award and execution of Public and private construction projects to subcontractors.(See Questions 1 and 2.)For payments to prime contractors on private construction projects,construction contracts typically require payment within 30 days ofsubmission of an approved pay application. Additionally, constructioncontracts on private projects often include a provision giving thecontractor the right to stop work because of an owner's nonpaymentand usually include notice provisions and an opportunity to cure.4. If your state does not regulate the timing of payments tosubcontractors, are there any common law restrictions on theflow down of payments to subcontractors, such as prohibiting"pay-if-paid" or "pay-when-paid" clauses?Ohio has a prompt payment act that regulates the timing ofpayments to subcontractors for public and private constructionprojects (see Questions 1 and 2).In addition, both "pay-if-paid" and "pay-when-paid" clauses areenforceable under Ohio common law. The Ohio Supreme Court hasheld that if contractual language "clearly and unequivocally showsthe intent of the parties to transfer the risk of a project owner'snonpayment from the general contractor to the subcontractor," theclause will be enforced as a valid "pay-if-paid" clause (Transtar Elec.,Inc. v. A.E.M. Elec. Servs. Corp., 16 N.E.3d 645 (Ohio 2014) (holdingthat using the term "condition precedent" in the payment provisionsatisfies the standard for such clear and unequivocal language)).Under a valid "pay-if-paid" clause, the contractor is not obligated topay the subcontractor if the owner never pays the contractor (TranstarElec., Inc., 16 N.E.3d at 649).Payment provisions that lack clear language shifting the risk of anowner's nonpayment to the subcontractor but specifying that thesubcontractor will be paid within a certain number of days afterthe contractor is paid are enforced as "paid-when-paid" clauses.Under these types of clauses, the contractor's obligation to pay thesubcontractor will come due at some point even if the owner has stillnot paid the contractor. For a further discussion of these clauses,see Practice Note, Pay-if-Paid vs. Pay-when-Paid in ConstructionContracts (http://us.practicallaw.com/9-604-7025).5. Does your state have a statute related to withholdingretainage on a publicly owned or financed construction project?If so, does the statute: Regulate the amount of retainage that can be withheld from acontractor or subcontractor? Require a partial release of or reduction in retainage at anypoint during the project? Govern when and how final retainage must be released? Impose any penalties for failure to comply with the statute? 2016 Thomson Reuters. All rights reserved.contract, price, and partial payments). Section 153.13 of the Ohio Revised Code (estimates of labor andmaterials, funds in escrow account). Section 153.63 of the Ohio Revised Code (escrow account forcontractor).AMOUNT OF RETAINAGEFor a unit or lump sum price contract, 8% of approved progresspayments must be held back as retainage on public projects until thejob is 50% complete. After 50% completion, 100% of approved progresspayments must be released. (Ohio Rev. Code Ann. § 153.12(A).)Ohio law does not address the amount of retainage that can bewithheld from a subcontractor or material supplier's progresspayments.PARTIAL RELEASE OF RETAINAGEThe statutes do not authorize the release of retainage held prior toa public project reaching substantial completion. However, for allpublic projects with a total cost of over 15,000, after attaining 50%completion, all retained funds must be deposited into an escrowaccount and invested in obligations selected by an escrow agent.(Ohio Rev. Code Ann. §§ 153.13 and 153.63(A).)FINAL RELEASE OF RETAINAGEAny retained funds and associated income on the funds must be paidto the contractor within 30 days, with only an amount necessary toassure project completion to be withheld, if both: A major portion of a project is substantially completed andoccupied, in use, or otherwise accepted. There is no other reason to withhold retained funds.(Ohio Rev. Code Ann. § 153.13.)Additionally, an escrow agent may only release any escrowedretainage if either: The public owner and contractor agree on dispersing theretainage. The escrow agent receives an arbitration or court order.(Ohio Rev. Code Ann. § 153.63(A)(2).)PENALTIES FOR FAILURE TO COMPLYRetainage not timely paid or deposited into escrow by the publicowner accrues interest at 8% per annum, compounded per diem(Ohio Rev. Code Ann. § 153.63(D)). Unauthorized withholding ofretainage also accrues interest at the average of the prime rateestablished at the commercial banks in the city closest to theconstruction project with a population of over 100,000 people (OhioRev. Code Ann. § 153.14). This interest is in addition to any interestearned in the escrow account (Ohio Rev. Code Ann. § 153.13).3
Construction Laws and Customs: Ohio6. Does your state have a statute related to withholdingretainage on a privately owned or financed constructionproject? If so, does the statute: Regulate the amount of retainage that can be withheld from acontractor or subcontractor? Require a partial release of or reduction in retainage at anypoint during the project? Govern when and how final retainage must be released?withheld at substantial completion is typically one and a half ortwo times the value of the remaining punch list work. The finalamount withheld is paid as the punch list is completed or after finalcompletion of all work.PROJECT DELIVERY SYSTEMS AND CONTRACT FORMS8. What forms of project delivery systems are most commonlyused in your state? Do they differ by the nature of theconstruction project? Impose any penalties for failure to comply with the statute?Ohio has no statute governing withholding retainage on privatelyowned or financed construction projects.However, Ohio's Prompt Payment Act specifies that a contractor canonly withhold retainage from a subcontractor if the owner withholdsretainage from the contractor in that same amount. If a contractorwithholds retainage from a subcontractor, the retained amountsmust be paid to the subcontractor within the shorter of: Ten calendar days after the contractor receives its retainagepayment from the owner. The time period provided in the contract.(Ohio Rev. Code Ann. § 4113.61(A)(3).)A contractor violating these provisions is subject to interest costsat the rate of 18% per annum and potentially attorneys' fees (seeQuestion 1).7. If your state does not regulate retainage on privately ownedconstruction projects, what is the custom and practice regarding: The amount of retainage withheld from each paymentrequisition? Does it differ for labor or material? Partial or early release of retainage upon achieving any projectmilestone or for early completion subcontractors? Requirements for the final release of retainage, including holdbacks for incomplete work or disputed amounts?AMOUNT OF RETAINAGEIn Ohio, private owners will typically withhold five to ten percentin retainage, depending on the size and type of project, therequirements of lenders, or other factors. There is generally nodifference between retainage on labor or material, although somecontractors may request that an owner waive retainage on paymentsof fee or general conditions items.In Ohio, private projects can utilize any project delivery system agreedto by the parties. Parties commonly use: Design-bid-build. Construction manager at risk. Design-build.The construction manager at risk and design-build approachesare generally favored on large and complex projects because theytypically allow the design and construction processes to proceedconcurrently on an integrated and fast-track basis.Deciding which project delivery system to use depends on the type ofproject, the schedule, and cost constraints. An owner might use thedesign-build or construction manager at risk method instead of thetraditional design-bid-build method if there is not enough time forthe design team to develop full plans before a set deadline for projectcommencement. The design-build method allows flexibility forschedule compression and save the owner in costs by consolidatingthe design and construction under one umbrella. However, the ownerin a design-build method relinquishes some control and independentchecks over the design process, which may result in loss of quality inthe construction.For a discussion of the characteristics of different project deliverysystems and ways to mitigate the risks associated with each, seePractice Notes, Private Construction Project Delivery Systems:Overview (http://us.practicallaw.com/5-546-2385) and Selecting theRight Private Project Delivery System (http://us.practicallaw.com/3-549-4368).On public projects, owners now have significantly more flexibility inchoosing project delivery systems. Previously, Ohio public agencieswere required to use the "multiple prime" method of contracting,in which the public owner held all of the trade contracts directly.Public owners can now utilize any of the following deliverymethods: Construction management at risk.PARTIAL RETAINAGE Construction management as advisor.Parties often will negotiate for early release of retainage for earlycompleting subcontractors. The owner will usually retain a measureof control over the decision to release retainage early. Design-Build.FINAL RETAINAGERetainage is released at substantial completion. The owner will retainan amount to cover any remaining punch list or other incompletework, lien claims, or other possible identified claims. The amount4 General contracting.9. Does your state have any statutes specifically related to designbuild or construction management? If so, do they apply to: Publicly owned or financed construction projects? Privately owned or financed construction projects? 2016 Thomson Reuters. All rights reserved.
Construction Laws and Customs: OhioPRIVATE PROJECTSIn Ohio, before 1995, the licensing requirements for design firmsprohibited non-licensed entities from providing design servicesand effectively prohibited the use of design-build project delivery.In November 1995, Section 4703.182 of the Ohio Revised Code wasamended to allow a contractor to provide design services througha design-build contract if the design services were provided by alicensed architect and the architect was either directly employed bythe contractor or engaged pursuant to a separate agreement with thecontractor. There is a similar statute relating to engineering services.(Ohio Rev. Code Ann. § 4733.161.)There are no construction management statutes applicable to privateprojects.PUBLIC PROJECTSDesign-build services are authorized on public projects forarchitecture services (Ohio Rev. Code Ann. § 4703.182) andengineering services (Ohio Rev. Code Ann. § 4733.161). A design-buildcontractor on a public project must also meet statutory requirementsrelating to professional liability insurance (Ohio R