Focus on New Laws: Changes to Retainage Requirements for Construction Contracts

July 22, 2019

New retainage requirements for city construction contracts take effect Aug. 1.

A new retainage law was enacted as part of the omnibus jobs, economic development, energy, and commerce finance bill (First Special Session Chapter 7) in article 9, sections 1 and 13. There were substantial changes this year, so cities should work with their city attorneys when entering into new contracts for public construction projects.

The new requirements, found in Minnesota Statutes, section 15.72, subdivision 2, and Minnesota Statutes, section 337.10, subdivision 4, are effective Aug. 1, and apply to agreements entered into on or after this date.

What retainage is

Retainage is a common practice in the private and public sectors, where a portion of the agreed-upon contract price is withheld until the construction work is complete to assure that the general contractor or subcontractor has satisfied their obligations.

Before the new law, 5% of the construction contract could be held for retainage from the general contractor. The general contractor, in turn, also was permitted to withhold 5% from its subcontractors.

Release of retainage

One of the most significant changes is when retainage must be released. Retainage must now be released no later than 60 days after “substantial completion” of a construction project, with some limited exceptions.

“Substantial completion” is defined consistently in Minnesota Statutes, section 541.051, subdivision 1(a). It is the date when construction is sufficiently completed so that the owner can occupy or use the improvement for the intended purpose. For streets, highways, and bridges, “substantial completion” is defined as the date when construction-related traffic devices and ongoing inspections are no longer required.

The general contractor must pay retainage to its subcontractors within 10 days after receiving retainage payment, unless there is a dispute about the work. The contractor must pay retainage to any subcontractor whose work is not involved in the dispute and must provide a written statement detailing the amount and reason for the withholding to the affected subcontractor.

Allowable withholding

After substantial completion, a city may still withhold (1) 250% of the cost to correct or complete work known at the time of substantial completion, and (2) the greater of $500 or 1 percent of the value of the contract for “final paperwork.”

Final paperwork is defined as documents required to fulfill contractual obligations including, but not limited to, operation manuals, payroll documents for projects subject to prevailing wage requirements, and the withholding exemption certificate required by Minnesota Statutes, section 270C.66 (IC 134 form).

If any payment is withheld for these reasons, a written statement must be promptly provided to the contractor, including the amount and basis of withholding. Withheld funds must be paid within 60 days after completion of the work or submission of final paperwork.

The new law also contains the following provisions:

  • Retainage reduction must be passed on to subcontractors. If the amount of retainage is reduced, the contractor must reduce retainage at the same rate for subcontractors.
  • Retainage cannot be held for warranty work. Withholding retainage for warranty work is prohibited. This provision does not waive any rights to warranty claims.
  • Certain requirements must be met before payment is made. The portion of a construction project funded with federal or state aid is only required to be paid when the federal or state aid has been received. Nothing in this section requires payment for a portion of a contract that is not complete or for which an invoice has not been submitted.

Cities should work with their city attorney and ensure that terms in their construction contracts are consistent with these changes in the law.