November 9, 2011

Legislative Hearing Set on Subcontractors' Bill Regulating Retainage on Private Projects

Holland & Knight Alert
Deborah S. Griffin

Early in 2011, the Associated Subcontractors of Massachusetts filed legislation, identified as "An Act Relative to Fair Retainage Payments in Private Construction" (Bill S00956), that would regulate retainage on private construction projects (see ourApril 4, 2011 Construction alert, Subcontractors in Massachusetts File Legislation Regulating Retainage on Private Projects). The Massachusetts legislative Joint Committee on Labor and Workforce Development will hold a hearing on this bill on November 17, 2011, at 10:30 a.m. at the State House in Boston. Representatives of several construction and real estate industry associations are expected to testify on the bill and its likely, or potential unintended, consequences. The hearing is open to the public.

If enacted in its current form, the bill would have significant effects on the construction industry.

As with the newly-enacted Prompt Pay law (Chapter 149, Section 29E), the bill would apply to every contract eligible for lien rights under Chapter 254, Sections 2 or 4, where the prime contract value is $3 million or more, but residential projects of one to four units are not 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). "Substantial completion" is defined generically by reference to the ability of the project owner to occupy or utilize the work for its intended use – a definition likely different from the contractual definition of the same phrase. Most construction contracts treat the criteria for and consequences of substantial completion in a much more elaborate manner and condition release or reduction of retainage on more than this simplified expression of substantial completion.

The bill would permit retainage to be withheld beyond 30 days after substantial completion for the estimated cost to complete or correct work items and also for outstanding "claims." To withhold payment for incomplete or corrective work, the person withholding payment of retainage must have given prior written notice that: (i) describes the incomplete or defective work; (ii) attributes a value to each described item; and (iii) certifies it is made in good faith. Unless there is a conditional payment clause enforceable under the Prompt Pay law (see our August 12, 2010 Construction alert, Massachusetts Adopts Landmark Subcontractor Payment Legislation), payment for the incomplete or defective work shall 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 certifies that it is made in good faith. The amount withheld because of a "claim" cannot exceed the estimated value of the claim stated in the prior notice. "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, but the bill in its current form does not define "resolution."

We will continue to monitor the bill's progress and advise of further developments.

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