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Massachusetts Adopts New Statute Regarding Payment of Retainage to Contractors

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| Legal Advisory

On August 8, 2014, Governor Patrick signed into law “An Act Relative to Fair Retainage Payments in Private Construction” (the “Act”), which is codified into law at Mass. Gen. Laws Chapter 149, Section 29F. The Act applies to contracts signed after November 6, 2014 with general contractors, subcontractors, design professionals and others who have rights to establish liens under Mass. Gen. Laws Chapter 254, Sections 2 and 4, where the original contract price with the project owner is $3 million or more. The Act, however, does not apply to projects containing or designed to contain one to four units of residential housing.

The Act prohibits retainage in excess of 5% of each progress payment under the construction contract. Retainage is defined under the Act as “a portion or percentage of a payment due pursuant to a contract for construction that is withheld to ensure full performance of the contract for construction.” As a result, even construction contracts that withheld 10% retainage on the first 50% of the project and 0% on the balance, resulting in a blended rate of 5% retainage, are no longer permissible.

The Act further establishes a timeline and procedure for the release of retainage. The general contractor must submit a notice of substantial completion (the “Notice”) to the project owner in the same form specified in the Act within 14 days of substantial completion of the project or applicable phase of the project (if phases are provided in the construction contract). The project owner must accept or reject the Notice within 14 days of receipt. The Notice is deemed accepted if it is not timely accepted or rejected. If the project owner rejects the Notice, the rejection must be in writing and must contain the factual and contractual basis for the rejection and a certification that the rejection is made in good faith. A rejection is subject to the dispute resolution provision of the contract.

No later than 14 days after acceptance of the Notice, or a final and binding resolution of the dispute, the project owner must submit in good faith to the general contractor a written punchlist describing any incomplete or defective work items or deliverables required under the contract. No later than 21 days after acceptance of the Notice, the general contractor must then submit in good faith a similar list to each subcontractor identifying those items on the project owner’s punchlist that apply to the subcontractor and any other items the general contractor adds to the list.

The general contractor and the subcontractor may submit written applications for payment of retainage within 60 days after substantial completion. An application for payment of retainage should be made in the manner required by the person’s contract, and must include the punchlist previously received and an indication of each item that has been completed, repaired and delivered. Retainage payments must be made by the project owner within 30 days following submission of the application for payment. General contractors have an additional 7 days to make retainage payments to subcontractors. A contract may establish the date of the month for submission of an application for payment of retainage, but the contract may not restrict the frequency of submissions to less than once a month.

After receiving an application for payment of retainage, the project owner may continue to withhold amounts for outstanding work or deliverables, but the Act limits the amounts withheld to: (a) the reasonable value of deliverables, but not more than 2.5% of the contract price of the contractor seeking payment of retainage; (b) 150% of the reasonable cost to complete the punchlist work; and (c) the reasonable value of claims for the contractor’s breach of its contract and costs incurred as a result of those claims. The withholding party must provide, before the date payment is due, a written description, made in good faith, of the incomplete or defective work items and deliverables and basis for the claims, and the value attributable to each. The general contractor and subcontractors may submit additional applications for payment of retainage following completion of the outstanding items.

All communications required under the Act may be sent electronically. Any contract provision that “purports to waive, limit or subvert” the terms of the Act or “redefine or expand the conditions for achievement of substantial completion for payment of retainage” is void and unenforceable.

Project owners, lenders and contractors will need to revise their standard agreements to conform to these new provisions. Time will tell whether the Act will now make it harder for project owners to ensure the timely completion of all aspects of their projects, given that contractors may have less at risk at the end of their contracts.

This advisory was prepared by Beth H. Mitchell, a member of the Real Estate and Finance practice group at Nutter McClennen & Fish LLP. For more information, please contact Beth or your Nutter attorney at 617.439.2000.

This advisory is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

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