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Massachusetts Retainage Law Shakes Up Construction Industry
Practical Law Legal Update 3-584-1226 (Approx. 4 pages)
Massachusetts Retainage Law Shakes Up Construction Industry
by Practical Law Real Estate
| Published on 13 Oct 2014 • Massachusetts |
On November 6, 2014, a new Massachusetts law governing retainage payments in private construction contracts will go into effect. This law establishes new definitions, time lines and caps on the witholding and release of retainage, including defining substantial completion. The consequences of this new legislation will impact developers, contractors, lenders, project owners and their counsel.
In a construction contract, a percentage of every progress payment is typically withheld to ensure that the contract is fully performed and defective work remedied. These withheld funds are known as retainage. Project owners withhold retainage from prime contractors, and prime contractors similarly withhold retainage from their subcontractors.
On August 8, 2014 Massachusetts Governor Deval Patrick signed legislation that will control how retainage is dealt with in private construction contracts. The law, Mass. Gen. Laws Chapter 149, Section 29F, will go into effect on November 6, 2014.
The highlights of the new law are as follows:
- Application. The law will apply to all construction contracts entered on or after November 6, 2014 with a contract price of $3 million or more. However, it will not apply to residential projects containing one to four units.
- Cap on Retainage. 5% is the maximum amount allowed to be withheld from a progress payment.
- Substantial Completion. The statute declares that substantial completion occurs when the contract work is sufficiently complete to enable the project owner to occupy or utilize the work for its intended use.
- Each phase of a project may be subject to substantial completion requirements if provided in the contract.
- A contract provision that "purports to waive, limit or subvert this section or redefine or expand the conditions for substantial completion for payment of retainage, shall be void and unenforceable."
- Good Faith. Most statutory notices between the prime contractor, project owner and subcontractors must be certified as being made in good faith.
- Procedure for Substantial Completion. The law lays out the following structure for determining substantial completion:
- The prime contractor must submit a notice to the project owner within 14 days of determining that it has achieved substantial completion.
- The project owner then has 14 days to accept or reject the contractor's determination of substantial completion.
- If the project owner fails to act within the 14 day period, the prime contractor's date is deemed to be accepted.
- A rejection by the project owner must contain a "factual and contractual basis," which will trigger contractual dispute resolution procedures that must begin within 7 days.
- Punchlists. Once the date of substantial completion is determined by agreement or final and binding resolution of a dispute, the project owner has 14 days to submit a punchlist of all defective or incomplete work and all outstanding deliverables. The prime contractor then has 7 days to submit individualized punchlists to each subcontractor.
- Application for Retainage. Sixty days after the date of substantial completion, an application for the release of retainage may be submitted. The application must include a description of all punchlist items that were completed, repaired and delivered.
- Continued Withholding of Retainage. After an application has been made for the release of retainage, the law limits the amount of funds that may continue to be withheld and places conditions on withholding:
- For outstanding or defective deliverables, a party may withhold either the agreed value of the deliverables or the reasonable value of the deliverables capped at 2.5% of the total adjusted contract price.
- For incomplete or defective work items, a party may withhold 150% of the reasonable cost to complete or correct the work.
- A party may withhold the reasonable value of the claims, costs, expenses and attorneys' fees if the claim is allowed under the contract.
- The withholding party must provide a notice that specifies the outstanding defective work or missing deliverables, the factual and contractual basis for withholding, and the value for each item.
- Multiple applications for further release of retainage may be made as work is completed.
- Where the prime contractor is not in default, the owner may not withhold from a subcontractor where the performance of its work is not in issue.
- Electronic Communications. The law specifically allows for required communications between the parties to be sent electronically.
Practical Implications
The new Massachusetts retainage law will influence the practice of construction attorneys and the activities of developers, lenders and contractors. Form agreements must be modified to comply with the new statute. Owners should also diligently monitor project progress and anticipate the date of substantial completion to prepare to accept or reject the notice from the prime contractor within the 14 day time frame under the statute.
Increased focus may also turn towards drafting effective dispute resolution procedures to ensure that projects are not unduly delayed if such provisions are triggered.
Construction lenders may also require more capital up front to make up for the 5% cap on retainage.
Overall, closer cooperation is needed between all parties to an applicable construction contract to comply with the statutory time frames.