Massachusetts enacted a new law regulating payment of retainage on construction projects. “An Act Relative To Fair Retainage Payments In Private Contracts” (“Act”) was approved by the Legislature and signed into law on August 8, 2014. The new law goes into effect Thursday, November 6, 2014. The Act substantially changes the rules for payment of retainage, determination of the date of substantial completion and completion of punchlist work. The Act applies to commercial projects where the prime construction contract exceeds $3 million. The Act does not apply to residential projects of 4 or fewer units or contracts entered into prior to its effective date.

The Act provides five core elements which dictate how project owners and contractors handle contract retainage, substantial completion and punchlists.

  1. Cap on Retainage: The Act caps the amount of retainage at 5% of the progress payment.   
  2. Substantial Completion: The Act codifies the familiar definition of substantial completion as the stage when the project is ready for the owner’s beneficial use. The prime contractor has 14 days after achieving substantial completion to submit a notice of substantial completion to the owner. The form of notice is prescribed in the Act. The owner then has 14 days to accept or reject the notice of substantial completion. If the owner does not take action on the notice, it is deemed approved. If the owner rejects the notice of substantial completion it must explain why and certify that it evaluated the work in good faith. The contract dispute resolution provisions govern disagreements over the date of substantial completion. The contractor must initiate the dispute resolution process within 7 days if the owner rejects its substantial completion certificate.   
  3. Punchlist Work: Within 14 days after acceptance of the notice of substantial completion, the owner must submit a written punchlist to the prime contractor with a certification that it was prepared in good faith. Similarly, the prime contractor must provide its subcontractors with a written punchlist (also certified that it was prepared in good faith) within 21 days of the acceptance of the certificate of substantial completion. The subcontractor punchlist may include items not identified by the owner.   
  4. Timing of Payment: The Act provides timeframes and processes for submitting and paying invoices for retainage. Retainage must be invoiced within 60 days after substantial completion and paid 30 days after receipt of the invoice with an additional 7 days allowed for each tier of subcontractors.   
  5. Amount of Payment: The Act places limits on the amount of retainage that can be withheld. For incomplete, incorrect or missing deliverables (i.e. close-out documents) the withholding cannot exceed 2.5% of the total value of the contract unless the parties otherwise agree in writing. For incomplete or defective work, the withholding cannot exceed 150% of the reasonable cost to correct or finish the work. In the case of claims, the owner may withhold the value of the claim plus costs and legal fees if permitted in the contract. Any withholding of retainage requires the owner to provide a written description of the outstanding items and the value of same together with certification that the list was prepared in good faith.

The Act allows incremental release of retainage. The Act prohibits “pay if paid” clauses except in narrow circumstances. Finally, unless the prime contractor has been declared in default under its contract, the owner cannot withhold retainage for subcontractors unless the subcontractor’s work is at issue in a claim against the prime contractor.