It’s been just six weeks since Massachusetts passed a new law governing retainage on private projects, and there are still six more weeks until it takes effect, on Nov. 6, as M.G.L. c. 149 §29F. Yet with the ink barely dry and the law not yet tested, some industry experts have already concluded that it is a disaster in the making – at least for building owners and developers. In recent articles, including one in last week’s issue of this publication, they take aim at subcontractors for passing “flawed” legislation that will – in their view – sour relationships, foment disputes and lead to lawsuits that could drive up costs, or even shut down projects.
But think about it: Why would subcontractors push for legislation that could have that result? Subcontractors want the same thing general contractors and building owners want: A good, trouble-free project, where the building is completed to the owner’s satisfaction, on time and on budget.
The new retainage law is designed to achieve just that – while also addressing a serious industry problem.
While it has long been the “industry standard” to withhold 10 percent of earned funds as retainage, that doesn’t make it right – and Massachusetts legislators recognized that. The harsh reality is, 10 percent is too much – typically, all of the profit on a project, and then some. And it is held far too long – often many months after a project is complete. This puts severe financial strain on subcontractors, who have to come up with the capital to pay 100 percent of the labor and materials costs week after week, while receiving just 90 percent payment in return. It is a daily cash flow challenge. If there is anything that puts a project at risk and drives up costs, it is a subcontractor with cash flow problems!
By limiting retainage to 5 percent, the new law improves cash flow for subcontractors, which in turn translates to less risk, fewer problems and lower project costs. Cutting retainage by 5 percent does not mean owners are now paying 5 percent more for their project. They are just paying 5 percent of earned funds sooner.
What about security to assure proper completion? The owner has plenty of opportunity during the course of a project to inspect the work and withhold regular payments for deficient performance. And if there are problems that don’t surface until the very end, they still have 5 percent retainage to fall back on, with new protections in the law to allow withholding from retainage not just for deficient performance, but for missing “deliverables” (documents) and claims, as well.
If general contractors – who are directly accountable to the owners – are now confident that 5 percent is sufficient holdback from subcontractors to secure their performance, then the owners should have no worries.
Percentages aside, the greatest change with the new law is the organized, timely process for closing out the job – beneficial to contractors and owners alike. First it defines substantial completion (using the standard American Institute of Architects definition), then lays out a process for establishing the date of substantial completion, in which the owner is an active participant. This in turn triggers a timeline for preparing the punchlist and requisitioning for retainage. The goal is to keep things moving, so that the project wraps up sooner and retainage is released faster than in the past. Who can argue with that? The certainty and predictability of the new process should help to lessen disputes, not cause them.
The new law earned the support of Massachusetts legislators because it is a fair and reasonable solution to a serious industry problem, providing a needed financial boost to businesses that are the backbone of the construction industry, while still protecting the interests of project owners in the process. Although the bill was first proposed by Associated Subcontractors of Massachusetts, the final version represented a true compromise, negotiated with the only organization that was willing to engage in discussions – the Associated General Contractors of Massachusetts.
Massachusetts now joins nine other states that have 5 percent retainage on private projects, including Connecticut, and we have heard of no negative fallout whatsoever in those states. No soured relations, no increase in lawsuits, no halt to development.
So let’s stop sounding the alarm and give the new law a chance – because it’s not just a law to help subcontractors. By accelerating project close out, and payment for work performed, it’s a law that benefits all parties to construction projects, and can only change the industry for the better.
Monica Lawton is CEO of the Associated Subcontractors of Massachusetts.
