On August 8th, 2014, Massachusetts State Governor Deval Patrick signed into law Chapter 276 of the Acts of 2014. This law limits the amount of retainage that can be held on private construction contracts to 5% of each progress payment, subject to various qualifying factors. The law also includes changes related to how “substantial completion” is determined. While this particular law will likely not have a direct impact on many Ohio contractors, the law is indicative of a shift in government policy related to private construction contracts.
Further evidence to the shift in government policy is Kentucky’s retainage reform, passed in 2007. Kentucky law (KY. REV. STAT. ANN 371.410) allows retainage of no more than 10% until the project is more than 50% complete, at which point retainage cannot exceed more than 5% of the total contract amount.
Ohio’s current law (R.C. § 4113.61) allows a contractor to “withhold amounts that may be necessary to resolve disputed liens or claims involving the work or labor performed or material furnished.” Retainage reform has been considered in Ohio since the early 2000s, with proposed changes gaining traction in 2006. Although the proposed retainage laws were ultimately not passed in Ohio, it is important to consider the effect that retainage reform would have on your business.
The unintended consequences of state laws that affect private construction contracts are many. Contractors on public-private projects, where the use of public funds are used for a portion of the project, could face additional complexity dealing with some mandated retainage on certain portions of the work at 10% and others at 5% for portions of their project. Also, financing for the construction period will have to be remodeled to accommodate a new cash flow reality.
Be Aware of Potential Repercussions
A state-mandated reduction in the allowable retainage percentage would have a significant impact on billing procedures, payment of sub-contractors, business lending practices for construction contractors and land developers and, most importantly, cash flows. Changes proscribed by certain governmental agencies not mirrored by others could cause cash flow mismatches, which could lead to hardship and sometimes sink projects. Proactive measures related to liquidity, such as building cash reserves and paying down debt, would lay the groundwork for insulating your business against state involvement.
Ensure that you are prepared for the changing landscape of government regulation and accounting standards. At Clark Schaefer Hackett, we’re staying on top of these developments that affect the construction and real estate industries, and we have experience guiding clients through these complex areas.
For more information, or if you have any questions, please contact Denice Hertlein.