Subcontractors in Massachusetts File Legislation Regulating Retainage on Private Projects

The Associated Subcontractors of Massachusetts recently filed legislation titled "An Act Relative to Fair Retainage Payments in Private Construction" (Bill S00956). As the name suggests, the proposed legislation would regulate retainage on private construction projects. If enacted in its current form, the bill would have a significant effect on the construction industry.

The Bill

As with the newly-enacted Prompt Pay law (Chapter 149, Section 29E), the proposed bill would apply to every contract eligible for lien rights under Chapter 254, Sections 2 (general contractors) or 4 (subcontractors), where the prime contract value is $3 million or more; residential projects of one to four units would not be covered.

The bill would impose a cap on retainage of 5 percent of each progress payment and would require that all retainage be paid within 30 days after substantial completion of the prime contract (seven days longer for each contract tier below the prime). In addition, it would permit retainage to be withheld beyond 30 days after substantial completion for: (1) the estimated cost to complete or correct work items and (2) outstanding "Claims."

To withhold payment for incomplete or corrective work, the person withholding payment of retainage must have given prior written notice that: (a) describes the incomplete or defective work; (b) attributes a value to each described item; and (c) certifies it is made in good faith. Unless there is a conditional payment clause enforceable under the Prompt Pay law (see Holland & Knight’s August 12, 2010, Construction Alert, “Massachusetts Adopts Landmark Subcontractor Legislation”), payment for the incomplete or defective work must be made no later than 30 days after the item is completed or corrected.

To withhold retainage for outstanding Claims, the person withholding payment of retainage must have given the person seeking payment "prior" written notice that describes the "factual and contractual basis" for the claim and certify that it is made in good faith. "Claims" is defined in the bill as "an allegation that the party seeking payment of retainage breached its contract for construction for the project." Amounts withheld due to such Claims must be paid upon "resolution" of the claim – although the bill in its current form does not define "resolution."

Public Hearings

The public hearing process on the bill is not likely to begin until May 2011, during which the reactions of industry participants will likely first be publicly disclosed. We will continue to follow the progress of this bill and related developments, and we will provide updates as warranted.