Subcontractors Can Expect Final Payment Sooner Under New Law

August 1, 2019

For all public/private construction projects in Minnesota, a new law dictates when final payments must be made. For all contracts entered on or after August 1, 2019, owners and general contractors must release retainage to subcontractors no later than 60 days after “substantial completion” of a project. This is a substantial departure from current law, which did not provide any “trigger date” for these final payments. It was not uncommon for subcontractors to wait months or years for retainage, which often represents a subcontractor’s profit on the project.

Six Takeaways from the New Retainage Law

  1. Owners and general contractors must release retainage to subcontractors no later than 60 days after “substantial completion,” which is defined as the date that the project can be occupied/used.
  2. An owner/contractor can withhold retainage only if they provide a “written statement” documenting a dispute that justifies the withholding of retainage.
  3. Upon a subcontractor’s written request, the owner must tell the subcontractor if a progress payment or retainage payment has been made to the general contractor.
  4. After substantial completion, an owner can withhold 250% of the costs to correct or complete punchlist work if the owner provides a written statement documenting the need for such punchlist work. The owner must pay such withholding no later than 60 days after the completion of such punchlist work.
  5. Additionally, even after substantial completion, the owner may withhold 1% of the value of the contract or $500 (whichever is greater) until the general contractor and/or subcontractors submit “final paperwork,” which is defined as all documents required to fulfill contractual obligations, such as O&M manuals, payroll documents for prevailing wage reporting, and withholding exemption certificates. Once such paperwork is provided, the owner must pay within 60 days.
  6. Withholding for “warranty work” is prohibited. Warranty work is contractually obligated corrective work that is necessary to address defects that arise after substantial completion.

Remember: If a general contractor fails to pass on a payment from an owner for a subcontractor’s work, the general contractor is subject to 18% annual interest, costs and attorney’s fees if the subcontractor successfully sues to recover the payment.