The proposed changes to Minnesota’s retainage law we had posted about previously were signed into law by Governor Dayton on May 19, 2016. Here are the basics about the changes to the law and what they mean for your business.
The revised statute permits contractors and subcontractors to stop work on a project if they are not paid within ten days after an undisputed payment is due. They are not required to continue work until they are paid. It will also allow recovery of interest, court costs, and attorney’s fees if civil suit is necessary to collect undisputed retainage. Before this new bill was passed by the legislature, the remedy of an unpaid contractor was interest at the rate of 1.5 percent per month along with attorney’s fees and the costs of collection.
Retainage is a device used in contracts in which the owner holds on to a specified percentage of payments as security against contractors or subcontractors failing to fulfill their contractual obligations. If there are no claims regarding the contractor’s work, retainage is generally released at the end of the project. With the reform to the retainage law, retainage will be capped at 5% under all contracts, regardless of whether they are public or private contracts or subcontracts. The law does not require retainage, but any provision allowing a higher retainage percentage will be unenforceable.
All contracts and subcontracts that are entered into on or after August 1, 2016 are subject to the changes to the retainage law. Regardless of whether or not work starts or continues after August 1st, contracts entered into before August 1, 2016 are not limited to the 5% retainage as long as the higher percentage is included in the contract.
What does this mean for your business?
If you are a general contractor, your business contracts and forms should be revised to remain compliant. Additionally, you will have to make sure retainages are released within 10 days to avoid paying interest on that money and to avoid subcontractors suspending work.
If you are a subcontractor, you have the right to suspend work if you are not paid as that right is now implied in every contract, whether it is stated explicitly or not.
One Final Note:
This law only applies to undisputed payments. The language of the law can be viewed here.