The Minnesota legislature recently passed a bill significantly amending Minnesota's prompt payment statute. The revised statute specifically authorizes contractors and subcontractors of any tier to stop work if they are not paid within 10 days after an undisputed payment is due. It also limits retainage to 5 percent on all construction projects in Minnesota. Signed into law by Governor Dayton on May 19, the changes will apply to all building and construction contracts executed after August 1, 2016.

PROMPT PAYMENT: SUSPENSION OF WORK

Minnesota has five "prompt payment" statutes requiring prime contractors to pay subcontractors within ten days after the contractor is paid for the subcontractor's work. These laws also apply to payments to subcontractors at all tiers. Only two of the prompt payment laws, those applying to state and local public projects, also require owners to pay prime contractors within the specified pay period.

Before the legislature passed the new bill, Chapter 133 of the 2016 Session Laws, the unpaid contractor's remedy was limited to interest at the rate of 1-1/2 percent per month plus attorney's fees and other costs of collection. With the amendment, however, the unpaid contractor or subcontractor may also stop work until paid: "If an undisputed payment is not received within ten days, the prime contractor or subcontractor of any tier that has not received the undisputed payment may suspend work under the building and construction contract until the undisputed payment is received." This is a powerful new weapon for both prime contractors and subcontractors.

The amendment does not require higher-tier contractors to tell lower-tier contractors when payments are made or what part of any payment is for the lower-tier's work. Subcontractors have the right to receive that information from owners on public projects under the Data Practices Act, but there is no similar access to that information on private jobs. Subcontractors could try to negotiate a subcontract provision requiring the contractor to alert them to higher-tier payments, but it remains to be seen how receptive contractors will be.

RETAINAGE

Retainage is a contractual device in which the owner retains a specified portion of earned progress payments, typically 5 or 10 percent, as security against the contractor's defective work or other non-performance. Retainage is typically released at the end of the project if there are no claims, though owners sometimes reduce retainage during the project if progress is satisfactory. Contractors and subcontractors likewise retain money from progress payments to their subcontractors.

The law has long limited public owners to retaining 5 percent from progress payments to their contractors, but has allowed private owners to withhold more than 5 percent if specified by contract. Contractors and subcontractors have been allowed to retain more than 5 percent from their subcontractors on both public and private projects as long as the higher amount is specified in the subcontract.

With this amendment, retainage will be capped at 5 percent under all contracts and subcontracts, public and private. Any provision allowing a higher percentage will be illegal and unenforceable. The law as amended does not require retainage and does not prevent an owner or contractor from reducing or eliminating retainage if it chooses. Neither does the law prevent an owner or contractor from withholding additional amounts if the contractor or subcontractor is not performing satisfactorily. The amendment only affects retainage.

Contracts and subcontracts entered into before August 1 are not limited to 5 percent retainage even if the work starts or continues after August 1, as long as the higher percentage is included in the contract or subcontract.