Massachusetts has just passed a law that governs the retainage process on private construction contracts. It applies to projects of $3 million or more, entered into after November 8, 2014. Essential elements are:
- Retainage is capped at 5%.
- The contractor must submit a notice of substantial completion within 14 days of the date substantial completion has been achieved.
- The owner has 14 days to respond to the notice, and the project will be deemed substantially complete if the owner fails to object within that timeframe.
- The owner is to submit a punchlist within 14 days after accepting – whether expressly or by implication – the substantial completion date. The contractor is to pass that list along to the pertinent subs within 7 additional days.
- The punchlist amount may not be greater than 150% of the value of incomplete or defective work, and for deliverables the punchlist is capped at 2.5% of contract value.
- The owner may not hold retainage for a sub whose work has been accepted, unless the prime contractor has defaulted.
- The terms of the new law may not be modified by contract, and any such agreed modifications “shall be void and unenforceable."
There are many bells and whistles that have been added to the process. In many instances a party must “certify in good faith” the action it has taken. If the contractor disagrees with the owner’s rejection of the notice, the contractor “shall” commence the contract dispute resolution process within 7 days. (This provision will result in more contracts calling for stepped dispute resolution, to avoid the need to commence litigation or arbitration in that 7-day time period; but the effect of failing to commence dispute resolution proceedings within 7 days is not stated.) No retainage is to be withheld at substantial completion unless the person seeking release of retainage has received, prior to the due date for payment, the punchlist. Similar to the Mass. prompt pay law, a party rejecting payment sought, or rejecting the proposed date of substantial completion, must state the “factual and contractual” basis for rejection. Finally, the law focuses on contractor and owner, and there is no mention of design professionals.
The law originated with the Associated Subcontractors of Massachusetts, and was modified through involvement of the Massachusetts AGC chapter. Owner and lender groups were opposed to the law but unable to derail its passage. The law does not apply to 1-4 unit residential projects even if above the $3 million threshold. The new law will be codified at Mass. Gen. Laws Ch. 149, § 29F. (The current prompt pay law is at § 29E.)
This law will fundamentally alter – and accelerate – project closeout on Massachusetts commercial projects.