By John Perten
Effective November 6, 2014, there is a new statute governing retainage on private construction projects. The new law caps retainage at 5% and establishes a rigid procedure for the release of retainage instead of permitting the parties to negotiate triggers, time periods and standards (as was the prior practice). Anyone who works on construction projects which fall within the statute needs to be aware as it is very technical, easy to run afoul of its provisions, and will require you to amend your standard contracts going forward. The following is a summary of the new requirements:
To What Kind of Projects Does the Law Apply?
The new law generally applies to private construction projects where the prime contract is at least $3,000,000 and is executed after November 6th. It does not apply to residential projects containing 1 to 4 units or to public projects.
What Does the Law Say About Retainage?
Retainage is capped at 5% of any progress payment.
How and When is Retainage Released?
The obligation to release retainage is triggered by the date of substantial completion.
a) Statutory Definition of Substantial Completion:
- “Substantial Completion: the stage in the progress of the project when the work required by the contract for construction with the project owner is sufficiently complete in accordance with the contract for construction so that the project owner may occupy or utilize the work for its intended use; provided further, that ‘substantial completion’ may apply to the entire project or a phase of the entire project if the contract for construction with the project owner expressly permits substantial completion to apply to defined phases of the project.”
As this is now a statutorily defined term, no longer can an owner expand the definition of substantial completion. One may wish to consider an expanded definition of “intended use.”
b) How Does One Determine The Date of Substantial Completion?
- Not later than 14 days after the prime contractor believes substantial completion has occurred, it is required to submit a statutory form to the owner stating the date on which it believes substantial completion has occurred.
The statute is silent about what happens if this requirement is not met by the contractor.
- Within 14 days, the owner must either accept the proposed date or reject it. If the owner rejects the notice, it must notify the prime contractor, in writing, within that period and provide both the factual and contractual basis for the rejection, and certify that the rejection is in good faith. On a large or complex project, 14 days may be an inadequate amount of time to comply with this requirement. The statute does not provide a means to extend this time.
- Failure to timely accept or reject date is deemed an acceptance.
- Within 7 days of rejection, the prime contractor must initiate the dispute resolution procedures in the contract, regardless of other deadlines in the contract.The new statute is clearly intended to prevent owners from using retainage as leverage. By requiring commencement of dispute resolution procedures within 7 days of rejection of a notice of substantial completion, it is likely that parties will be forced into litigation earlier than they might otherwise have been. Because all claims arising out of the same transaction are to be joined, it may also force early litigation of other claims too. This effectively ensures rampant litigation as it gives very little time for negotiation.
Making mediation part of the dispute resolution procedure, and a mandatory pre-condition to litigation or arbitration, may buy more time.
- Within 14 days from the acceptance (or deemed acceptance) of substantial completion or completion of the dispute resolution process, the owner shall submit a punchlist containing all items of incomplete or defective work and missing deliverables, certified in good faith. Traditionally, it was the contractor who prepared the initial punchlist. This reverses the procedure.
- Within 21 days from the acceptance of the notice of substantial completion or completion of the dispute resolution procedure, the prime contractor must provide any subcontractor from whom it is holding retainage, a written list of all items of incomplete or defective work and missing deliverables attributable to that person’s work. This list can include things that are not on the owner’s list.
- Unless the contract provides for an earlier release, upon the expiration of 60 days from substantial completion or the finalization of the dispute resolution procedure, a person may submit an application for release of retainage, containing a list identifying the incomplete or defective work and deliverables on the list that have been completed, certified in good faith.
- Payment of retainage is due 30 days after the application. For lower tier subcontractors, you can add an additional 7 days.
Can Retainage Be Withheld for Incomplete Work or Missing Deliverables?
The owner can withhold retainage for incomplete or defective work or incomplete, defective or missing deliverables by following the required steps:
- Before the date payment is due, the owner must give notice, in writing, describing the incomplete, defective or missing deliverables, incomplete or defective work, or claims, certified in good faith;
- If the parties can agree, in writing, on a value for incomplete, incorrect or missing deliverables, the owner can withhold that amount. If not, the value will be a sum not to exceed 2.5% of the total contract of the person seeking the release to cover deliverables;
- For incomplete or defective work, 150% of the reasonable cost to compete or correct defective work;
- If there are claims, the reasonable value of claims plus attorneys’ fees (if permitted under the contract); and
- For later applications, same procedure applies.
- If the prime contractor has not been declared in default by the owner, the owner cannot withhold any retainage due to subcontractors or the prime contractor’s proportional retainage calculated thereon based on a claim by the owner unless the claim relates to that subcontractor’s work.This encourages the owner to default the prime contractor anytime there are problems with a subcontractor’s work so as to preserve its right to withhold retainage.
The new statute must be studied, standard contracts reviewed and revised to comply with the new deadlines, statutory forms made part of the contract documents, and internal controls established to ensure compliance. If you are an owner, you want to, among other things, avoid constructive acceptance of the substantial completion date if the project is not, in fact, substantially complete. When coupled with the recent Prompt Pay Act, which governs progress payments on private projects, the ability of any owner to manufacture financial leverage on a Massachusetts project has been significantly curtailed. Massachusetts is a great place to be a contractor. The same is not necessarily true for an owner.
John H. Perten is a shareholder at Sheehan Phinney Bass + Green PA. He is a member of the Construction, Litigation and Business Groups. He may be reached at firstname.lastname@example.org or 617.897.5641.
This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice.
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