Flow-Down Defective-Work Clauses Override Time-and-Materials Billing; Recoupment Permitted Against Same-Contract Sums

Case: Umoja Erectors LLC v. D.A. Nolt Inc., et al.

Court: United States Court of Appeals for the Third Circuit (Not Precedential)

Date: October 23, 2025

Panel: Circuit Judges Phipps, Chung, and Roth (Opinion by Judge Phipps)

Lower Court: E.D. Pa., bench judgment for D.A. Nolt; Rule 59(e) motion denied

Introduction

This appeal arises from a subcontract dispute on a City of Philadelphia public works project—the conversion of facilities into a Public Safety Services Campus to house the police headquarters. General contractor D.A. Nolt, Inc. engaged Umoja Erectors, LLC on a largely time-and-materials (T&M) basis to perform structural steel work. Multiple fabrication and erection errors required corrective work and caused delay. The general contractor refused to pay Umoja for time related to corrective work and withheld most of a $30,000 coordination fee to recoup backcharges and delay-related costs. Umoja sued for breach of contract, unjust enrichment, and under Pennsylvania’s Prompt Pay Act, and after a four-day bench trial the district court entered judgment for Nolt. Umoja appealed the final judgment and the denial of its Rule 59(e) motion.

The Third Circuit affirmed. The court’s opinion clarifies several practical rules for public construction subcontracts that incorporate owner standard contract requirements (SCRs):

A flow-down defective-work clause can bar payment for corrective work even under an otherwise T&M subcontract.
The “Project Manager” authorized to reject defective work may be a delegate; a contractor’s project executive could serve in that role where the contract so permits and the factfinder so finds.
Damages based on invoices must be proven with reasonable certainty; where corrective work is non-compensable, invoices must segregate corrective from non-corrective time and materials.
Under Pennsylvania law, recoupment may offset amounts otherwise due under the same contract; the offset need not be tied to the same “transaction” within that contract.

Although the decision is designated non-precedential, it provides salient guidance for drafting, administering, and litigating T&M subcontracts on public projects in Pennsylvania and within the Third Circuit.

Summary of the Opinion

The Third Circuit reviewed the district court’s legal conclusions de novo and factual findings for clear error and affirmed on all issues:

No payment for corrective work despite T&M structure. The subcontract incorporated the City of Philadelphia’s SCRs, including a defective-work clause requiring the contractor to repair or replace defective work “without additional compensation.” Read together, the T&M payment terms and the defective-work clause meant Umoja could not recover for time spent correcting its own defective fabrication and erection work.
Authority to reject defective work. The district court did not clearly err in finding Nolt’s project executive served as the Project Manager with authority to reject defective work under the SCRs, which permit designation or delegation of that role.
Invoices lacked reasonable certainty. Because corrective work was non-compensable and Umoja’s invoices did not distinguish corrective from non-corrective work, the district court did not err in denying recovery on those invoices for lack of reasonable certainty.
Recoupment from coordination fee permissible. Pennsylvania recoupment allows offsets arising out of the same contract, not necessarily the same discrete occurrence. Nolt could therefore recoup its backcharges and delay-related costs against the unpaid portion of Umoja’s lump-sum coordination fee.
Rule 59(e) denial upheld. Umoja’s post-judgment motion did not warrant altering or amending the judgment.

Analysis

Precedents Cited and Their Influence

United States v. U.S. Sugar Corp., 73 F.4th 197 (3d Cir. 2023) and Vuyanich v. Smithton Borough, 5 F.4th 379 (3d Cir. 2021):
These decisions set out the appellate standards of review—de novo for legal conclusions and clear error for fact findings—which framed the Third Circuit’s deferential posture toward the district court’s fact determinations (e.g., who was the “Project Manager” and whether invoices were sufficiently certain).
Skolnick v. Commissioner, 62 F.4th 95 (3d Cir. 2023) and Cooper v. Harris, 581 U.S. 285 (2017):
Reinforced the “clear error” standard—affirming fact findings if plausible and reversing only on a definite and firm conviction of error. This supported upholding the finding that Nolt’s executive acted as the Project Manager under the SCRs.
Wilcox v. Regester, 207 A.2d 817 (Pa. 1965):
Articulates Pennsylvania’s “reasonable certainty” requirement for contract damages. The court relied on Wilcox to endorse the district court’s refusal to award unimpeached but undifferentiated invoice totals where non-compensable corrective work was intermixed with potentially compensable work.
Northwestern National Bank v. Commonwealth, 27 A.2d 20 (Pa. 1942):
Provides the classic statement of Pennsylvania recoupment doctrine—offsets arising from the same contract. This authority underpinned the court’s approval of recouping backcharges and delay-related costs from the unpaid coordination fee, even if those costs were not the “same transaction” as the fee-earning activities.

Legal Reasoning

Flow-down of owner SCRs into a T&M subcontract.
The subcontract expressly bound the subcontractor to the general contractor “by the same terms and conditions” the GC had with the City, specifically incorporating the City’s SCRs. The defective-work clause states: “The Contractor shall remove, at its own expense, any work or material rejected by the Project Manager as unsuitable, unfit, or otherwise defective and not in accordance with the Contract Documents, and shall repair, replace or reconstruct the same without additional compensation.” The Third Circuit agreed with the district court that these provisions operate “in tandem,” not in tension: T&M governs compensable work; the SCRs carve out non-compensable corrective work when the work is defective and rejected.
Authority of the “Project Manager.”
The SCRs define “Project Manager” to include the City’s designee or any representative the Project Manager designates in writing. The district court, crediting testimony from Nolt’s Vice President/O’Brien, found he served as Project Executive/Project Manager for the project. On clear-error review, the Third Circuit held that this factual finding was plausible and sufficient to validate the rejection of Umoja’s defective work under the SCRs, even without proof that the City’s Project Manager personally issued the rejection. Delegation under the SCRs filled that gap.
Reasonable certainty and invoice segregation.
Because corrective work is not compensable under the defective-work clause, an invoice that aggregates corrective and non-corrective work without differentiation lacks the “reasonable certainty” necessary to support contract damages. The record lacked any legend, coding, or location-based demarcation to segregate rework hours and materials from productive, compensable work. The court’s reasoning underscores that where contract terms render certain categories of time non-compensable, the claimant must segregate those categories in its proof.
Recoupment against the coordination fee.
Umoja argued that Nolt’s offsets were not tied to the same “transaction” as the coordination fee (e.g., backcharges such as temporary facilities or other delay costs). The Third Circuit rejected a transaction-level nexus requirement. Under Pennsylvania law, recoupment is available so long as the offset arises from the same contract. Here, both the fee and the GC’s backcharge claims arose under the same subcontract. Thus, the district court permissibly allowed Nolt to recoup costs by withholding the unpaid portion of the $30,000 coordination fee.
Prompt Pay Act and Rule 59(e).
While the court did not analyze the Prompt Pay Act claim in detail, its logic implies that where the underlying entitlement to payment fails (non-compensable corrective work; insufficient certainty), statutory prompt-payment penalties likewise fail. As for Rule 59(e), the court saw no basis to disturb the judgment—no clear error of law, newly discovered evidence, or manifest injustice.

Impact and Practical Implications

For T&M subcontracts, incorporated defective-work clauses are decisive.
Even on a T&M basis, subs cannot assume rework will be compensated if the contract incorporates owner SCRs or similar defective-work provisions. Counsel should scrutinize flow-down clauses and advise subs that rework may be categorically excluded from payment.
Documentation discipline is critical.
Where corrections may be non-compensable, subs should implement robust timekeeping and billing segregation:
- Use separate cost codes for corrective vs. new production work.
- Flag locations, activities, and crews devoted to corrective tasks.
- Provide narratives and legends on invoices to make segregation self-evident.
- Maintain corroborating daily reports and change directives where scope is disputed.
Failure to segregate can result in zero recovery for mixed invoices.
Authority chains matter in public projects.
Owner SCRs often allow delegation of the Project Manager function. A GC representative may wield rejection authority if the contract permits and the facts support it. Parties should clarify and document delegations so that rejection decisions are procedurally sound and defensible.
Recoupment is broad if tied to the same contract.
Under Pennsylvania law, recoupment need not be tied to the same event or invoice; being within the same contract suffices. This expands the GC’s ability to net backcharges against any unpaid sums (e.g., fees, retainage), and cautions subs to anticipate offsets across the contract’s payment streams.
Prompt Pay exposure tracks underlying entitlement.
Where nonpayment stems from contractually authorized rejection and invoices lack the requisite certainty, prompt-pay penalties are unlikely. Conversely, when subs segregate compensable work and the GC still withholds without contractual basis, prompt-pay risk escalates.
Litigation posture and standards of review.
On appeal, fact findings about roles (Project Manager) and invoice certainty receive deferential review. Parties should build the trial record with precise testimony and documentation because plausibility alone can insulate those findings on appeal.

Complex Concepts Simplified

Time-and-Materials (T&M): A payment method where the contractor is reimbursed for actual labor at agreed rates and for materials at cost (often with a markup). It does not guarantee payment for every hour worked if the contract excludes categories of work (such as corrective work caused by the contractor’s defects).
Defective-Work Clause: A provision requiring the contractor to correct rejected, non-conforming work at its own expense and “without additional compensation.” Such clauses shift the cost of rework back to the party responsible for the defect.
Flow-Down Clause: Language binding the subcontractor to the same obligations the general contractor owes the owner (here, the City’s SCRs), effectively importing owner-side terms into the subcontract.
Project Manager Authority: Under many public SCRs, the Project Manager may be the owner’s designee or a properly delegated representative. A GC’s project executive can be recognized in that role if the contract allows and the factfinder credits the evidence of delegation or designation.
Reasonable Certainty (Damages): Pennsylvania requires that contract damages be proven with reasonable certainty. If certain categories are non-compensable, invoices must be sufficiently detailed to separate those from compensable work.
Recoupment: A defensive offset arising from the same contract as the plaintiff’s claim, allowing the defendant to reduce the amount owed. Distinguished from “setoff,” which typically involves separate contracts or transactions.
Rule 59(e): A motion to alter or amend a judgment, granted only for intervening changes in law, newly discovered evidence, clear error of law, or to prevent manifest injustice.
Clear Error vs. De Novo Review: On appeal, factual findings are reversed only if the appellate court has a “definite and firm conviction” a mistake was made (clear error). Legal conclusions are reviewed without deference (de novo).

Key Takeaways

A T&M subcontract that flows down owner SCRs can still bar payment for corrective work; the “without additional compensation” language controls.
Rejection authority need not come directly from the owner’s employee if the contract permits delegation and the factfinder accepts the evidence of delegation/designation.
To recover, subs must present invoices that segregate compensable from non-compensable work with reasonable certainty; undifferentiated billing risks wholesale denial.
Pennsylvania recoupment permits offsets against any amounts due under the same contract, enabling GCs to net backcharges against fees and other sums.
Prompt-pay remedies generally rise or fall with the underlying contractual entitlement; proper rejections and uncertain invoices will defeat statutory claims.

Conclusion

Umoja Erectors v. D.A. Nolt reinforces a practical but potent set of rules for public construction contracts in Pennsylvania. Incorporating owner SCRs into a T&M subcontract can turn corrective work into a non-compensable category, despite the T&M structure. The authorized Project Manager (or delegate) can make binding rejection decisions that trigger the defective-work clause. Where invoices blend compensable and non-compensable time without clear segregation, Pennsylvania’s “reasonable certainty” standard forecloses recovery. Finally, recoupment operates broadly to allow offsets across all sums due under the same contract. While non-precedential, the opinion offers a roadmap for contract drafting, project administration, and litigation strategy—especially the importance of precise flow-down language, documented role delegations, and meticulous billing practices that separate rework from productive, compensable performance.