Andrew Lynn, Esq.
Massachusetts passed a law this month limiting retainage of payments to subcontractors to 5% of the subcontractor’s price.
Retainage is the withholding of a portion of a subcontractor’s payment until completion of the overall project - or even months later - and is common practice even when the subcontractor’s work is finished at an early stage of construction. Currently, a normal operating procedure in the industry is to withhold 10% of the subcontractor’s fee. (In fact, on some projects controlled by federal regulations, 10% is required.) Developers and contractors say that this withholding is necessary leverage in case a problem is found after the subcontractor’s task is complete, and the subcontractor must be called back to repair or finish the work.
So, for example, if the subcontractor is involved in the foundation or steel framing, and finishes the work one year before completion of the project, that subcontractor must wait that year - while plumbers, electricians, finish framers, drywallers, lighting installers, masons, landscapers, etc., etc., finish their tasks, before receiving the final payment. Subcontractors argue that this withholding is unfair, because the subcontractors incur labor and materials costs at the time they perform the work and need those payments if they are to make any income. They also argue that retainage is not necessary, because good relations with contractors and developers are fundamental to their business and the need to keep their clients happy is enough incentive to bring them back to a job site.
The new law takes effect in November. It applies to projects costing $3 million or more, and sets a timetable for subcontractor payments. While the ripple effects have yet to be seen, the halving of retainage will have some effect on the cost of financing, as owners, contractors and developers will have to be in possession of a larger percentage of their funding at an earlier stage. Whether the decrease in retainage will cause a corresponding increase in the number of subcontractors who refuse to return to an old job is yet to be seen.
As always, these are just introductions and overviews, not legal advice. If you have specific questions, or need a new contract, talk with a lawyer. I am a Massachusetts attorney and I default to Massachusetts law; some of the information in my blog posts will inevitably be incorrect in other places.