The Massachusetts construction industry has been rocked by a new law, passed by the legislature as Senate Bill 2271.
The law reduces the amount of money property owners and developers can withhold from general contractors who in turn withhold from subcontractors working on their building projects, a practice called “retainage.”
Owners and developers claim to need the leverage that retainage gives them over subcontractors especially toward the end of a project to ensure that the subs will stay on the job and finish their work, especially if problems arise.
Under the former law, up to 10% of the contract amount could be withheld. The new law reduces that percentage to 5%.
Subcontractors have been pushing for the change since 2011, when the Associated Subcontractors of Massachusetts promoted a bill limiting retainage but the bill failed due to fierce opposition from developers.
Subcontractors claim that they need the cash on hand to buy building supplies and materials and that they have been bearing a disproportionate share of the risk on new construction and remodeling projects.
Not only is 10% retainage too much, they argue, but it is often withheld far too long, sometimes as long as several months after a construction job is completed. The new law requires payment in full of the withheld funds within 90 days after “substantial completion” of the subcontractor’s part of the work.
In 2013, the subcontractors formed an alliance with the Associated General Contractors, convincing them that the bill would free up working capital for the general contractors and reduce the amount they would have to pay out of pocket to keep a job going until the property owner approves the work and makes the final payments.
The new Massachusetts law establishes a definitive process and timing for both payment schedules and for the closeout of construction projects. Starting in early November, the new law limits to 5% of a contract the amount a developer may withhold for retainage. The current industry standard is for developers to withhold 10%.
The new law applies only to projects valued at $3 million or more, but in this era of inflated real estate values and rising costs of materials, many homeowners, whether building new homes or remodeling existing homes, may find themselves within the parameters of the new law.
Property owners and developers still strongly oppose the bill. They object to the complicated process the law creates as well as the 5% withholding requirement.
An additional twist is that the 5% retainage conflicts with the federal requirements for Housing and Urban Development projects, which require a 10% retainage.
This would not be a direct issue for the homeowner with a remodeling project, but the additional paperwork of complying with both sets of requirements may drive up costs across the board as contractors and subcontractors begin to comply with the procedures of the new law.
At Pulgini & Norton, we are familiar with all applicable real estate and construction law. As experienced Massachusetts real estate attorneys, we can help you with all of your real estate legal needs. If you have a home construction or remodeling project that may fall within the requirements of the new law, give us a call today at 781-843-2200 or contact our office online, and we can help legally clear the way for you.
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