ASA Report Shows Retainage Reform as Important Trend in 2007
New Mexico Is First State Ever To Prohibit Retainage
by David Mendes

ALEXANDRIA, Va. ? In 2007, several states benefited from powerful new laws that address business practices that, for decades, have created cash flow and other financial problems for construction subcontractors. Working through the American Subcontractors Association?s (ASA) chartered local chapters and state organizations, ASA members played an integral role in generating this ?wave of change? by educating policymakers about the effects of business practices such as retainage, slow payment, and inequitable risk transfer. ASA has documented these policy changes in its 2007 edition of The ASA Report: The Policy Environment in the States.

Now in its fourth year, ASA?s annual report scores each state in individual policy areas such as prompt payment and anti-?bid shopping? policies, and uses the scores to assign an overall score and grade to each state. The results of the scoring showed a significant trend in new state laws limiting the practice of retainage, which is the withholding of an amount of progress payments (usually a percentage of the contract value or a specified dollar amount) owed to a contractor or subcontractor until its client determines that the funds should be released.

In 2007, four states adopted laws affecting their scores in the ?retainage limitation policies? category of ASA?s report: Kentucky, New Mexico, North Carolina and Tennessee. Most significantly, New Mexico became the first state ever to effectively prohibit retainage. This groundbreaking reform is one reason that New Mexico continued its reign as the state with the highest overall score in ASA?s report for a fourth year, even increasing its lead with an overall score of 90 in 2007 as compared to 69 in 2006.

?ASA?s campaign to raise awareness of the antiquated, harmful practice of retainage, which financially punishes all contractors regardless of performance, is paying off,? said 2007-08 ASA President David H. Bradbury, Precision Concrete Construction Inc., Alpharetta, Ga. ?Special congratulations are in order for ASA of New Mexico for its tireless work culminating in the state?s unprecedented elimination of retainage. ASA effectively laid the groundwork for retainage reform through many years of advocacy and education.?

ASA is contacting media, legislators and other public officials across the country to share the results of The ASA Report: The Policy Environment in the States. ASA?s campaign will warn subcontractors of deficits in their state laws, provide advocacy information to help change laws, and educate subcontractors about the need to remain vigilant when negotiating contracts in a harsh public policy environment.

ASA calculated the overall grade for each state (and the District of Columbia) by scoring seven key state public policy areas, and then combining the points for a final score and a final grade for each state. ASA scored: (1) Prompt payment protections; (2) Treatment of pay-if-paid clauses; (3) Mechanic?s lien protections; (4) Payment bond protections; (5) Retainage limitations; (6) Anti-indemnity protections, including limits on ?additional insured? endorsements; and (7) Anti-?bid shopping? measures. The scoring in each policy area took into account both laws and judicial decisions.

The ASA Report: The Policy Environment in the States determined that, other than New Mexico, every state and the District of Columbia earned a failing grade, or overall score of 60 points or less out of 100, in 2007 where key public policies impacting subcontractors are concerned.

?The overwhelming number of failing scores reflecting poor public policies shows why subcontractor advocacy is so important,? said Bradbury. ?The ASA Report is history?s record that not just retainage reform, but also payment reform and risk transfer reform, are possible. ASA urges subcontractors to use the report to learn about the policies in their states and to educate decision-makers about what changes are needed, and why.?

Retainage

New Mexico received a score of 100 in the category of ?retainage limitation policies? for S.B. 604, which Gov. Bill Richardson (D) signed into law on April 6, 2007. The law prohibited the use of retainage on both private and public construction as of June 15, 2007, except for residential construction projects containing four or fewer dwellings and for state Department of Transportation projects.

Kentucky?s score in this category increased from 15 to 75, North Carolina?s increased from 32 to 52, and Tennessee?s increased from 47 to 77.

Under Kentucky?s Fairness in Construction Act of 2007 (H.B. 490), retainage is limited to 10 percent of ?any undisputed payment due? until a project is 50 percent complete. Thereafter, retainage is limited to 5 percent of the total contract amount and all retained funds received from the project owner must be passed on to subcontractors within 15 days of receipt. Within 30 days of substantial completion, all retainage must be released less an amount equal to 200 percent of the value of any uncompleted work. Retainage not released by the deadlines accrues interest at the rate of 12 percent per year. The law applies to construction contracts in both the public and private sectors, but excludes residential construction.

In North Carolina, S.B. 1245 will prohibit retainage on public projects under $100,000 and limit retainage to 5 percent on other public construction projects starting on Jan. 1, 2008. The law stipulates that an owner, with written consent of the surety, shall not hold retainage from progress payments to contractors for satisfactorily performed work starting at 50 percent completion, and limits the amount of retainage an owner may hold should it choose to hold any additional retainage after that time. These terms also apply to contractors? payments to subcontractors. Strongly supported by ASA of the Carolinas (ASAC), the new law also will require the full release of retainage within 60 days of substantial completion or occupancy, whichever occurs first.

Thanks to the leadership of ASA of Tennessee (ASATN), subcontractors in the Volunteer State are benefiting from millions of dollars in project earnings made available through a law (Public Chapter 201) enacted in May 2007. Signed May 22 by Gov. Phil Bredesen (D), the measure (H.B. 1003) limits retainage on all public and private construction projects in the state to 5 percent, while requiring that retained funds be kept in interest-bearing escrow accounts. It also requires release of retainage by construction owners, contractors and subcontractors within specific time frames.

Effective July 1, 2007, the law also addresses late payment of retainage. It requires a construction owner to release all retainage to a prime contractor within 90 days after completion of work or substantial completion of a project, whichever occurs first. The law requires prime contractors to pay retainage to subcontractors, and subcontractors to pay sub-subcontractors and suppliers, within 10 days of receipt of retainage held for the work/supplies they provide.

Anti-Indemnity

Several states earned points in other categories of The ASA Report.

For example, while Colorado earned an overall grade of ?F,? it celebrated the greatest score increase of any state in a single policy category, raising its score for ?anti-indemnity/?additional insured? policies? from 0 to 94. ASA of Colorado (ASAC) saw several years of persistent advocacy pay off on April 11, when Gov. Bill Ritter (D) signed a sweeping indemnity reform bill (S.B. 87) into law that, as of July 1, 2007, prevented the contractual transfer of liability in construction contracts and closed the additional insured loophole. The legislation said ?[a]ny provision in a construction agreement that requires a person to indemnify, insure or defend in litigation another person against liability for damage arising out of death or bodily injury to persons or damage to property caused by the negligence or fault of the indemnitee or any third party under the control or supervision of the indemnitee is void as against public policy and unenforceable.?

As a result of this law, Colorado?s overall score increased from 19 to 32. Colorado celebrated another important public policy victory in 2007, but this victory did not affect the state?s scores because it sustained existing subcontractor-friendly policy rather than expanding rights. In its ruling on the appeal of Fowler & Peth, Inc. v. Regan, the Colorado Supreme Court preserved one of the main methods provided by the state?s mechanic?s lien laws for subcontractors and suppliers to recover amounts due to them when they fail to receive payment for work they properly perform. Throughout the appeals process leading up to the high court?s Feb. 5, 2007, ruling, and with the support of ASA?s Subcontractors Legal Defense Fund (SLDF), ASA and ASAC supported, with legal briefs, subcontractors? and suppliers? rights to recover payment.

Aiming to clarify risk transfer in construction contracts, Georgia Gov. Sonny Perdue (R) signed legislation (H.B. 136) that expanded the state?s restriction against broad-form indemnification to include additional insured requirements ? and effectively closed a loophole created by court interpretations of Georgia?s indemnity statute. Georgia?s score in this category increased from 0 to 41.

Previously, the state?s anti-?broad form? indemnity statute appeared to void indemnification agreements that required one party to indemnify and hold harmless the other for claims arising out of the indemnitee?s sole negligence. However, Georgia appellate courts created an exception that when a broad form indemnity clause ? which by itself would be void and unenforceable under the statute ? is coupled with a corresponding contractual obligation for the indemnitor to provide insurance coverage, the statute does not apply and the clause is fully enforceable. The courts said this loophole extends even when a claim arises out of the indemnitee?s sole negligence.

Signed May 18, the main purpose of this new law, according to David Hendrick, Esq., Hendrick, Phillips, Salzman & Flatt, Atlanta, Ga., was to close this loophole and enforce ?the public policy irrespective of insurance coverages and contractual requirements so that if the indemnity clause is ?broad form? it is void and unenforceable ? insurance aside.?

Pay-if-Paid

The ASA Report measured advances in two states on the important economic issue of the use of pay-if-paid clauses. In a national survey of ASA members conducted in the fall of 2005, more than 90 percent of respondents ranked pay-if-paid clauses a serious issue for their businesses.

New Mexico?s pay-if-paid score went from 0 to 90 in The ASA Report due to a provision in S.B. 574 that specified that a contingent payment clause does not constitute a waiver of mechanic?s lien rights. The law took effect on June 15, 2007.

June 16 marked a momentous occasion in Texas construction history as Gov. Rick Perry (R) signed into law a landmark anti-?contingent payment? bill (S.B. 324). The signing also represented a major victory for ASA of Texas (ASAT) and ASA?s five Texas chapters whose members invested numerous hours lobbying, meeting and educating state representatives on the need for such legislation. The change took Texas? score in this category from 0 to 75.

Effective Sept. 1, 2007, the new law made contingent payment clauses in construction contracts unenforceable unless nonpayment is the result of failure to meet contractual obligations by the party seeking payment.

?Time and time again, Texas subcontractors have seen payment slip through their fingers due to no fault of their own,? said ASA-Houston Chapter President Craig Kramer, Astro Fence Company, Houston, Texas. ?Thanks to the hard work of ASA members and their allies, that era will soon come to a close.?

The measure specifically limits sureties? enforcement of contingent payment clauses and makes such clauses unenforceable for work/materials delivered 45 days after notice is received for nonpayment of an undisputed invoice. ?Unconscionable? contingent payment clauses are unenforceable if the party to which payment was due is able to prove that the owing party did not perform due diligence and offer ?reasonable cooperation? in collecting amounts due. The new law does not apply to design services, civil engineering construction and small residential construction projects.

Prompt Payment

Several states celebrated advances in the category of prompt payment policies: Illinois, Kansas, Kentucky and New Mexico.

Illinois? prompt payment score increased from 30 to 66. On Aug. 31, Gov. Rod Blagojevich (D) signed H.B. 743, the Contractor Prompt Payment Act, which requires payment from the owner to the prime contractor for undisputed work within 15 calendar days of approval. The law also requires contractors and subcontractors to pay their subcontractors within 15 calendar days of receipt of payment. A penalty of 10 percent annual interest accrues on late payments and work can be suspended with seven days? written notice. The law took effect immediately.

Thanks to the efforts of ASA-Greater Kansas City (ASA-GKC), subcontractors in Kansas are now assured of payment on all projects following the enactment of the Fairness in Public Construction Contract Act (S.B. 333). Signed by Kansas Gov. Kathleen Sebelius (D) on April 21, the new comprehensive prompt payment law requires public owners to pay contractors undisputed amounts due within 30 days of receiving a proper invoice and contractors to pay subcontractors within seven days of receiving payment from owners. The seven-day requirement applies to all lower tiers of construction. Late payments will be subject to interest at a rate of 18 percent per annum. The change earned Kansas 45 points in the prompt pay category ? its score increased from 41 to 86 in this category.

The new law represents a major victory for ASA-GKC. Supported by a Subcontractor Advocacy Grant from ASA, the Kansas City, Mo.-based chapter campaigned for S.B. 333 as it made its way through both houses of the legislature. The chapter helped secure the enactment of similar legislation for private work two years before.

?Fairness is our goal ? and was from the start,? said ASA-GKC Secretary/Treasurer Ken Keller, Western Extralite Co., Kansas City, Mo. The new law addressed other critical issues, such as prohibiting contractual bond waivers; permitting suspension of work for nonpayment, with proper notice; requiring disputes to be settled in the county where a project is located; and voiding ?no damage for delay? clauses.

In addition to its retainage provisions, Kentucky?s Fairness in Construction Act of 2007 specifies that owners must pay undisputed amounts to contractors within 30 business days after receiving a payment application, and that contractors must pay subcontractors within 15 business days after receipt of payment from the owner. Past-due payments bear interest at 12 percent per year. Kentucky?s prompt payment score rose from 6 to 78 in 2007.

The same bill (S.B. 604) that prohibited retainage in New Mexico also earned the state a 35-point increase from 46 to 81 points in the ?prompt payment policies? category. The law set a 21-day deadline for a construction owner to pay its contractor after receiving an undisputed invoice and allowed for 1.5 percent interest per month on late payments. Payments to subcontractors and suppliers on all tiers of construction are required to be made within seven days of receipt of payment from the owner, contractor or subcontractor. Local public agencies receiving grants for construction are allowed up to 45 days to render payment.

Mechanic?s Liens

In the category of mechanic?s lien policies, only Kentucky?s score changed in the 2007 edition of The ASA Report, with an increase from 64 to 74. H.B. 490 amended the lien statute by extending the time a contractor has to file a lien. Unpaid subcontractors and suppliers on public projects have 60 days from last furnishing labor or materials or the date of substantial completion, whichever is later, to file a lien.

Lien policy changes took place in Connecticut and Tennessee of which subcontractors may want to take note, but which did not change the states? scores.

In Connecticut, a new law that amends the state?s mechanic?s lien statute aimed to help those lien bond claimants who are victorious in their litigation. Under the terms of the new measure (H.B. 7236), courts are required to award costs and attorney fees when a plaintiff prevails in any action upon a bond that has been substituted for a mechanic?s lien. Signed June 11 by Gov. M. Jodi Rell (R), the new law took effect Oct. 1, 2007.

Tennessee lien law was rewritten this year with the enactment of S.B. 2031. The law re-defines subcontractors as ?remote contractors,? clarifies the scope of liens, allows liens on undelivered materials, and supplies language for forms of notice.

The ASA Report did not measure significant activity in 2007 in the categories of anti-?bid shopping? or payment bond policies. The ASA Report: The Policy Environment in the States is available on the ASA Web site, www.asaonline.com.

Founded in 1966, ASA amplifies the voice of, and leads, trade contractors to improve the business environment for the construction industry and to serve as a steward for the community. ASA?s vision is to be the united voice dedicated to improving the business environment in the construction industry. The ideals and beliefs of ASA are ethical and equitable business practices, quality construction, a safe and healthy work environment, and integrity and membership diversity.

Contact: David Mendes
(703) 684-3450, Ext. 1335
dmendes@asa-hq.com