Massachusetts enacted a new retainage law that will require owners, prime contractors and subcontractors to pay retainage according to the law’s terms on a construction contract if:

• the construction contract is a prime contract between private parties, entered on or after November 6, 2014, or a subcontract arising under such prime contract;
• the construction contract between the owner and prime contractor has an original value of not less than $3 million;
• a lien may be established on the project; and
• the project is not a residential project of four or fewer units

The new law has consequences for owners, lenders, prime contractor and subcontractors.

What does the new law change?

The Retainage Act limits retainage to 5 percent of any progress payment, applies new timing requirements to retainage release, and largely prohibits an owner from withholding that portion of retainage owed to a prime contractor’s subcontractor that is not based on the performance of that specific prime contractor’s subcontractor’s actual performance.   

What are the new requirements for retainage release?

• Prime contractor: The prime contractor must submit a notice of substantial completion within 14 days after reaching substantial completion in substantially the same form set forth in the statute.
• Owner: The owner must accept or reject the notice of substantial completion within 14 days of receipt, or the notice will be deemed accepted. A rejection of a notice of substantial completion must state the factual and contractual basis for the rejection. Failure to reject in this manner will result in the notice being deemed accepted.  A rejected notice of substantial completion will be subject to the dispute resolution provisions of the contract.
• Prime contractor: If the prime contractor disputes the rejection, the statute allows and requires the prime contractor to commence dispute resolution procedures within seven days of receipt of the owner’s rejection. In addition, “an express or deemed acceptance of a notice of substantial completion” is final and binding on the project owner and its successors and assignees for all purposes.
• Owner: The owner must provide a punchlist within 14 days of substantial completion.
• Prime contractor: The prime contractor must provide a punchlist to all subcontractors and  suppliers from which it is withholding retainage within 21 days of substantial completion.
• Prime contractor, subcontractor or supplier: A prime contractor, subcontractor or supplier may submit a written application for payment of retainage that must include an update concerning punchlist items. This application may be submitted once 60 days passes from substantial completion, and earlier if the parties agree to an earlier submission.

Except for withholdings allowed by the statute, the owner must pay retainage no later than 30 days following submission of the application and the time period for payment is extended by seven days for each tier below the prime contractor. Retainage can be withheld for and in an amount no greater than:

• for incomplete, incorrect or missing deliverables, either (a) a mutually agreed upon amount or (b) if no agreement on the amount to withhold is reached, the reasonable value, which shall not exceed 2.5% of the total adjusted contract price of the party seeking payment of retainage;
• 150% of the reasonable cost to complete or correct work items; and
• the reasonable value of claims and any costs if such withholding is allowed in the contract for construction.

A party withholding retainage must provide a punchlist of the items it is withholding money for.  A contract cannot require a delay of the applicable dispute resolution procedure with respect to payment of retainage for more than 30 days after either the rejection of a payment application for retainage or written notice of the dispute.  

What else do I need to know?

Payment of retainage is subject to the Prompt Pay Act, Mass. Gen. Laws ch. 149, § 29E.  Generally, submittals, applications, rejections and other forms required under the statute must be certified as made in good faith.  The time period requirements set forth in the statute are, by and large, tolled during the pendency of final and binding dispute resolution. The Retainage Act prohibits and deems void contract provisions that do not comply with the statute or purport to waive its provisions. The Retainage Act allows for electronic exchange of documents.    

The Retainage Act is an important new statute that owners, lenders, contractors and subcontractors working in Massachusetts need to be familiar with.