Possible Reform to Minnesota’s Retainage Law

Many subcontractors and material suppliers have complaints about Minnesota’s current retainage law because it does not set a limit on how much of the contract price contractors are allowed to retain in building and construction contracts. Additionally, the law does not provide a time frame for when the retainage has to be paid to the subcontractors or material suppliers, potentially resulting in unnecessary delays for those parties to receive payment. Recently, a new bill addressing these and additional issues was introduced to the House and the Senate.

The bill proposes three major changes. First is a 5% cap on the amount of retainage allowed on building and construction contracts. The bill makes it clear that a retainage is not required and parties may eliminate retainages from their contracts if they see fit. Second, the bill proposes that retainage amounts be included under Minnesota’s prompt payment law, meaning that retainages must be paid to subcontractors or material suppliers within 10 days of receipt or completion of the project. Third, the bill gives subcontractors the right to suspend work under the contract until the undisputed payment is received. If this bill is passed, it will go into effect on August 1, 2016 and will apply to all contracts signed on or after that date.

So how will the bill affect your business if it is passed? If you are a general contractor, your business contracts and forms should be revised to remain compliant. Additionally, if this bill is passed, contractors have to make sure retainages are released within 10 days to avoid paying interest on that money and to avoid subcontractors suspending work.

Under current law, if you are a subcontractor and you haven’t been paid, you still have to continue working unless there is a provision in your contract that gives you the right to suspend work if you’re not paid. The new bill changes this. The right to suspend work would be implied in every contract, whether it is stated explicitly or not.

For the time being, if your business involves a lot of subcontractor work, you should consult an attorney to draft a provision that allows you to suspend work until your company is paid. It is not clear at this point how previous contracts will be affected by this bill if it is passed, but it is still important to make note of any contracts that may not be compliant.

Please note that these proposals apply only to undisputed funds. Additional information and language of the bill can be viewed here.