Retainage Legislation Increases Risks and Hinders Development

Yesterday I testified before the Legislature’s Joint Committee on Labor & Workforce Development in opposition to legislation that would make substantial changes to contractor retainage payments. NAIOP believes that the legislation, An Act Relative to Fair Retainage Payments in Private Construction – H. 1401 and S. 956, would hinder economic development at a time when the construction and development sectors are still reeling from the worst recession in a generation.

The bill sets an outside limit of 5% (reduced from the standard practice of 10%) for approved contract payments that can be withheld for retainage.  Retainage is traditionally held until final completion of a project in order to incentivize prompt completion of the project and guarantee that the contract is fulfilled as agreed.  The legislation changes the final payment date to within 30 days after “substantial completion” (a phrase that is unclear and likely to be the source of many legal battles) and it would create enormous uncertainty for developers.

Very few development projects are moving forward.  Financing, especially for larger projects, is extremely difficult to obtain.  Anything that increases uncertainty could make financing a project even more difficult.

Finally, though supported by the Associated Subcontractors of Massachusetts, this legislation could actually have a negative impact on the smaller, less established subcontractors.  Without adequate retainage, developers will not be willing to take a risk with a lesser known subcontractor.  As a result, the legislation would give an advantage to the bigger subcontractors.

Given the current economy, the Commonwealth should be doing all it can to encourage job creation, not find ways to slow or hinder economic development.  Though we do not think the legislation has a high likelihood of passage, we will continue to advocate against it through the remainder of the legislative session.

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