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THE NEW MASSACHUSETTS
RETAINAGE LAW
ASSOCIATED SUBCONTRACTORS
OF MASSACHUSETTS
SEPTEMBER 15, 2014
Carolyn M. Francisco, Esq. [email protected]
Corwin & Corwin LLP www.corwinlaw.com
600 Unicorn Park Drive 617-849-6032
Woburn, MA 01801
Copyright © 2014 Corwin & Corwin LLP
Brief History
2010 Prompt Pay Law Passed (M.G.L. c. 149, sec. 29E)
• Periodic Payments
• Change Orders
• Pay-if-Paid Terms
• Right to Suspend
2011 ASM Files Original Retainage Bill
• Simple bill
• At urging of leadership ASM reaches out to opposing parties
Copyright © 2014 Corwin & Corwin LLP
Brief History
2013 ASM Again Files Retainage Bill
• July 2013 public hearings
• AGC reaches out to ASM in fall of 2013
• Many months of negotiations
• June 2014 a final consensus bill achieved
• Legislature Passed on 7.31.14
• Governor Signed on 8.8.14
• M.G.L. c. 149, sec. 29F
Copyright © 2014 Corwin & Corwin LLP
Purpose of Law
Natural extension/companion of the Prompt Pay Law
Address the last, most difficult payment to collect – RETAINAGE!
Establish a reasonable, not-to-exceed limit on the amount of retainage that may be withheld
Establish an efficient, timely process for closing out a project
Establish a reasonable, not-to-exceed time period in which retainage must be paid
Establish reasonable, not-to-exceed allowed holdbacks from the payment of retainage
Copyright © 2014 Corwin & Corwin LLP
Projects Affected
Law goes into effect November 6, 2014
Applies to private projects where prime
contract signed after November 6, 2014
and has an original value of $3 million or
more
Does not apply to residential projects of 1-
4 units
Same as Prompt Pay Law
Copyright © 2014 Corwin & Corwin LLP
Contracts Affected
Applies to all contracts eligible for
mechanic lien rights under M.G.L. c. 254
◦ All written prime contracts
◦ All written subcontracts (every tier)
◦ Suppliers with written contracts with prime
contractor or any-tier subcontractor
◦ Same as Prompt Pay Law
Copyright © 2014 Corwin & Corwin LLP
Limit on Retainage That May
Be Withheld
No more than 5% of a
progress payment
◦May be less
◦May not be more
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Project Closeout Process:
Substantial Completion Defined
Statutory obligations of Owners and
Prime Contractors once Substantial
Completion achieved
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Project Closeout Process:
Substantial Completion Defined
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…”
Substantial Completion may apply to the entire project or a phase of the entire project if the prime contract expressly permits substantial completion to apply to defined phases of the project.
Copyright © 2014 Corwin & Corwin LLP
Project Closeout Process: Getting
to Date of Substantial Completion
i.) Not later than 14 days after reaching Substantial Completion Prime Contractor must submit to Owner a Notice of Substantial Completion (statutory form) setting forth date of Substantial Completion, according to the Prime Contractor, and certified as made in good faith
Copyright © 2014 Corwin & Corwin LLP
Project Closeout Process: Getting to
Date of Substantial Completion
ii.) Within 14 days of receipt Owner shall accept or reject Notice of Substantial Completion
◦ If Owner accepts parties proceed to punch list
Acceptance = signing Notice and delivering to Prime Contractor
◦ If Owner rejects must send written notice to Prime Contractor of rejection, with factual and contractual basis for rejection and certification that rejection made in good faith
Copyright © 2014 Corwin & Corwin LLP
Project Closeout Process: Getting
to Date of Substantial Completion
Rejection of Notice subject to dispute
resolution procedures in contract, which
Prime Contractor must commence within
7 days of receipt of rejection
Owner and Prime Contractor shall
prosecute dispute resolution procedures
diligently, expeditiously and in good faith
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Project Closeout Process: Getting to
Date of Substantial Completion
If Owner neither accept nor rejects Notice within time and manner required in statute, Notice is deemed accepted and parties proceed to punch list
Upon express or deemed acceptance, date of Substantial Completion shall be the date stated in the Prime Contractor’s Notice for all purposes
Owner’s express or deemed acceptance of Notice binding on Owner and its successors and assigns
Copyright © 2014 Corwin & Corwin LLP
Project Close Out Process:
Punch List Owner must submit punch list to Prime
Contractor no later than 14 days after
acceptance (express or deemed) of Notice
of Substantial Completion, or after
resolution of dispute
◦ Punch list must include all “incomplete or
defective work items ” and “deliverables”
◦ Punch list must be certified as made in good
faith
Copyright © 2014 Corwin & Corwin LLP
Project Close Out Process:
Punch List Prime Contractor must submit punch list to
all persons from whom Prime is withholding
retainage (e.g., Subcontractors) no later than
21 days after acceptance (express or deemed)
of Notice of Substantial Completion, or after
resolution of dispute
◦ Punch list must include all “incomplete or
defective work items ” and “deliverables”
◦ Punch list must be certified as made in good faith
◦ Punch list may include items not on Owner’s list
Copyright © 2014 Corwin & Corwin LLP
Project Close Out Process:
Punch List Incomplete or Defective Work: “labor,
materials or any other item required for
full performance by a person seeking
payment of retainage which remains to be
furnished by the person under the person’s
contract for construction, or which has
been furnished by such person but
requires correction, repair, further
completion, revision or replacement.”
Copyright © 2014 Corwin & Corwin LLP
Project Close Out Process:
Punch List
“Incomplete or Defective Work” is NOT:
◦ “Deliverable”
◦ Labor, materials or other items to be repaired
or replaced after substantial or final
completion or per warranty, guaranty or other
contractual requirement to correct after
substantial or final completion
Copyright © 2014 Corwin & Corwin LLP
Project Close Out Process:
Punch List
Deliverable: “close-out document required
to be submitted by the person seeking
payment of retainage under the person’s
contract for construction”
Copyright © 2014 Corwin & Corwin LLP
Project Close Out Process:
Punch List
• Deliverable is NOT:
◦ A document affirming, certifying or
confirming completion or correction of labor,
materials, etc..
• Lien waivers and releases which are
deliverables must comply with mechanic’s lien
law
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Project Close Out Process:
Good Faith & Timely
Owner and Prime Contractor must
fulfill statutory close out obligations
in good faith and in a timely manner
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Payment of Retainage:
When and How to Invoice
Requisition for retainage may be submitted 60 days after Substantial Completion (or resolution of dispute) ◦ Can be earlier if contract allows
◦ Must be in form required by contract
◦ Must include a list of Incomplete or Defective Work items completed and Deliverables submitted, and list must be certified as made in good faith
◦ Contract may establish date of the month to submit retainage requisition Submit too early deemed submitted on date due
Copyright © 2014 Corwin & Corwin LLP
Payment of Retainage:
Deadline to Pay Owner must pay Prime Contractor’s
retainage requisition no later than 30 days after submission
Add 7 days for each tier below the Owner
◦ Prime Contractor must pay Subcontractor’s retainage requisition no later than 37 days after submission
◦ Subcontractor shall pay Sub-subcontractor’s retainage requisition no later than 44 days after submission
Copyright © 2014 Corwin & Corwin LLP
Payment of Retainage:
Allowed Holdbacks
Not more than the following amounts may
be withheld from payment of retainage:
i.) Deliverables:
value as mutually agreed in writing by the parties to
the contract of the person seeking payment of
retainage; OR
if no value is agreed in writing, the reasonable value
not to exceed 2.5% of the total adjusted contract
price of the person seeking payment of retainage
Copyright © 2014 Corwin & Corwin LLP
Payment of Retainage:
Allowed Holdbacks
ii.) 150% of the reasonable cost to
complete or correct Incomplete or
Defective Work items
Copyright © 2014 Corwin & Corwin LLP
Payment of Retainage:
Allowed Holdbacks iii.) reasonable value of any “Claims” (and
costs and attorney’s fees incurred as a result
of the claims if allowed in the contract of the
person seeking payment of retainage)
◦ Claim: “an allegation that a person seeking
payment of retainage breached the person’s
contract for construction”
allegation that the person seeking payment breached his
contract
Claim subject to applicable dispute resolution provisions,
notice and other requirements in contract
Copyright © 2014 Corwin & Corwin LLP
Payment of Retainage:
Allowed Holdbacks Condition of Holdbacks:
◦ No amount may be withheld from payment of retainage unless person seeking payment has received, before the date payment is due, a writing:
describing Incomplete or Defective Work items and value attributable to each item;
describing Deliverables, and value attributable to each deliverable
describing the factual and contractual basis and value attributable for each Claim
certified as made in good faith
Copyright © 2014 Corwin & Corwin LLP
Payment of Retainage:
Incremental Release May submit additional retainage
requisitions as Incomplete or Defective Work items are completed and corrected, Deliverables are submitted and Claims are resolved
No contract may restrict submission of retainage requisitions to less frequently than 1 per calendar month
Same requirements for submission and payment of subsequent requisitions
Copyright © 2014 Corwin & Corwin LLP
Payment of Retainage:
Disputes
A rejection of a retainage requisition or
disputes regarding Incomplete or Defective
Work items, Deliverables or Claims subject
to applicable dispute resolution provisions
Contract provision requiring a party to delay
dispute resolution until later than 30 days
after either rejection of retainage requisition
or written notice of dispute, whichever first
occurs, is void and unenforceable
Copyright © 2014 Corwin & Corwin LLP
Payment of Retainage:
No Pay if Paid Except…
Payment of retainage is subject to
Prompt Pay Law restrictions on pay if
paid contract terms (M.G.L. c. 149,
sec. 29E(e)
Copyright © 2014 Corwin & Corwin LLP
Payment of Retainage:
No Pay if Paid Except…
MGL c. 149, sec. 29E(e):
◦ Contract provisions conditioning obligation to pay on receipt of payment from third party void and unenforceable except in two circumstances:
Non-performance
Insolvency
For non-performance and insolvency exceptions to apply they must be expressly stated in contract
Copyright © 2014 Corwin & Corwin LLP
Payment of Retainage:
No Pay if Paid Except…
Non-performance Exception
◦ Pay-if-paid enforceable if non-payment from
third party is due to non-performance of the
person seeking payment; and
◦ Person seeking payment failed to cure the
non-performance after receipt of written
notice within the time required in contract to
cure, or if contract has no cure period, within
14 days after receipt of written notice
Copyright © 2014 Corwin & Corwin LLP
Payment of Retainage:
No Pay if Paid Except… Insolvency Exception
◦ Pay-if-paid enforceable if third party is insolvent or becomes insolvent within 90 days after submission of pay application; and
◦ Party seeking to enforce pay-if-paid:
filed Notice of Contract before submission of first application for payment for on-site work Notice of Identification filed by lower tier subcontractors
filed Statement of Account within time required by M.G.L. c. 254
filed suit to enforce lien within time required by M.G.L. c. 254
pursued all reasonable legal remedies to obtain payment from third party until there is a reasonable likelihood the action will not result in obtaining payment
Copyright © 2014 Corwin & Corwin LLP
Payment of Retainage:
Miscellaneous Prime Contractor’s retainage for self-
performed work eligible for payment to same extent as Subcontractor’s retainage
Provided Owner has not declared Prime Contractor in default, Owner may not withhold the retainage of a Subcontractor (or the Prime Contractor’s proportional retainage calculated thereon) for a claim that the Owner asserts against the Prime Contractor that is not based on the performance or default of the Subcontractor.
Copyright © 2014 Corwin & Corwin LLP
ELECTRONIC
COMMUNICATIONS
& NO WAIVER
Communications required under the law
to be in writing may be submitted in
electronic form and by electronic means
Any contract provision which purports to
waive, limit or subvert the law, or redefine
or expand the conditions for achievement
of substantial completion for payment of
retainage is void and unenforceable
Copyright © 2014 Corwin & Corwin LLP
Considerations
Revise applicable contracts to
comply with Prompt Pay and
Retainage Laws
◦Change terms of applicable
contracts or attach Rider
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Considerations
Rider:
“The terms of M.G.L. c. 149, secs. 29E and sec. 29F shall supersede any contrary or conflicting terms in the attached Contract [Subcontract; Sub-subcontract; Purchase Order].”
“The parties intend that the attached Contract [Subcontract; Sub-subcontract; Purchase Order] comply with M.G.L. c. 149, secs. 29E and 29F. Any term in the attached Contract [Subcontract; Sub-subcontract; Purchase Order] which is contrary or conflicting to M.G.L. c.149, secs. 29E or F shall be deemed re-written to the extent required to conform to M.G.L. c. 149, secs. 29E. and 29F.”
Copyright © 2014 Corwin & Corwin LLP
Considerations
Can negotiate for less than 5% retainage
Can negotiate for submission of retainage
requisition and payment of retainage
sooner than not-to-exceed timing in
statute
Can negotiate lesser amounts for
holdbacks in three categories
Copyright © 2014 Corwin & Corwin LLP
Considerations
Clearly define Deliverable requirements
in contract
Try to agree up-front, in writing,
reasonable amounts to be withheld for
each Deliverable
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Considerations
Carefully review Riders presented to
determine compliance with law
Pay attention to when Substantial
Completion is achieved
Inquire with Prime Contractor about status
of submission and acceptance of Notice of
Substantial Completion
Know your rights and obligations
Copyright © 2014 Corwin & Corwin LLP
Conclusion
Purpose of law to set a reasonable, not to exceed, limit on the amount of retainage that may be withheld; establish an organized and timely method of closing out a project; and provide a reasonable, not to exceed, time period in which retainage must paid
Prompt flow of funds and timely close out benefits all
Statute should make routine good practices and procedures
Copyright © 2014 Corwin & Corwin LLP
Thank you!
The foregoing is intended as a general guide relating to the new Massachusetts Retainage Law. It is not legal advice and should not be considered or relied upon as a substitution for consultation with an attorney. The legal and factual issues involved in any matter vary significantly from project to project, contract to contract, jurisdiction to jurisdiction and time to time. An attorney should be consulted with respect to the contract, facts and law applicable to any specific construction law issue.
Copyright © 2014 Corwin & Corwin LLP