CONSTRUCTION CONTRACTS;

You asked for a summary of HB 5010, An Act Concerning Retainage, which was favorably reported by the General Law Committee on March 25, 2003.

SUMMARY

This bill establishes payment and retainage procedures in construction contracts, other than those involving (1) residential property consisting of four or fewer dwelling units, (2) projects valued at less than $ 25,000, or (3) state or municipal public building or public works contracts. Specifically, the bill requires property owners to make timely interim payments to contractors and subcontractors, sets retainage thresholds, requires retainage amounts to be placed in escrow accounts, and sets a time by which payment must be made after construction is completed.

The bill authorizes courts to award court costs and reasonable attorney’s fees in any action to enforce the bill. It is effective January 1, 2004.

TIMELY PARTIAL PAYMENTS

The bill requires most contracts between a contractor and a property owner that require the contractor to build, alter, repair, install, or demolish property to provide that the owner and all contractors and subcontractors will make timely payments of all amounts due. Specifically, the owner must agree to pay undisputed amounts due, other than retainage, no later than 30 days after he receives a request for payment. And contractors and subcontractors are bound to pay their subcontractors and suppliers no later than seven days after they receive payment. “Retainage” means money otherwise payable to a contractor or subcontractor that an owner withholds until substantial or final completion of all work under contract.

Manner of Payment and Penalty for Nonpayment

The bill permits owners, contractors, and subcontractors to pay the debt owed under the contract by first class mail, electronic funds transfer, or hand delivery. Any owner, contractor, or subcontractor who fails to make a timely payment must pay interest on the unpaid amount at the rate of 1. 5% for every month or fraction of a month that the debt goes unpaid. The owner must pay interest from the first date the payment was due. Contractors and subcontractors begin to pay interest on the eighth day after payment was due.

Duty to Pay When Incomplete or Improperly Completed Invoices

If the owner receives an incomplete or improperly completed invoice, the bill requires him to tell the person who sent it of the nature of the deficiency no later than seven days after it was received. Once he communicates this, the owner’s duty to pay is delayed until he receives an invoice in a reasonably acceptable form.

The bill prohibits creditors from collecting, enforcing a security interest against, garnishing, or levying execution on retainage or other payments that an owner, contractor, or subcontractor owes another person or that person’s surety who has furnished labor or material pursuant to a construction contract.

RETAINAGE

The bill sets the maximum allowable retainage by owners at 7. 5% of the total estimated cost of work and value of materials stored both on and off the construction site. Materials stored off-site must be insured. Contractors and subcontractors cannot withhold, as retainage, from subcontractors and suppliers a percentage amount greater than that being withheld from them. However, it is not clear that contractors or subcontractors can retain money from subcontractors or suppliers since, by definition, owners are the only people who can retain money.

The bill requires an escrow account to be established for all retainage, but does not specify who must establish the account. Despite this omission, it is clear from the owner’s duties with respect to the account that he must control it. What remains unclear is whether a contractor or subcontractor must establish an account for money they withhold from subcontractors or suppliers. Certain provisions, like the one requiring contractors and subcontractors to pay interest on the account on a pro rata basis at the time retainage payments are made, suggests that they must establish an account. But the other provisions refer only to “owners” thereby suggesting that contractors and subcontractors do not have to establish an account.

“Property owners” must establish an escrow account for all retainage. They must:

1. establish the account in a Connecticut or Connecticut-chartered national bank or in savings and loan associations domiciled here;

2. pay interest on the account on a pro rata basis at the time he makes retainage payments to the contractor and contractors and subcontractors must also pay interest on a pro rata basis;

3. give the contractor monthly reports of the value of the retainage in the account and any additions to the account or payments from it, which can only be effected with the owner’s approval;

4. terminate the account when the construction contract is completed and accepted and he has paid the contractor in full;

5. pay all fees and expenses related to maintaining the account; and

6. include the form and provisions of the account in all solicitations for construction services and provide the contractor and subcontractor with a copy before entering into a contract.

The bill permits any owner who enters into multiple construction contracts with the same contractor to combine the retainage under each contract into one account. Subsection 8 of Section 3 of the bill makes the owner liable to the contractor, subcontractor, or their sureties for his failure to maintain the account, but does not specify the nature of the liability. Section 7 of the bill requires an owner who fails to deposit retainage in an escrow account or to release it as required by the bill to pay the contractor, but not the subcontractor or their surety, 1. 5% of the non-deposited or non-released amount for each month or fraction thereof until the retainage is paid in full.

The bill permits contractors and subcontractors to offer property owners securities in lieu of retention, but does not require owners to accept them.

OWNERSHIP AND CARE OF MATERIAL AND WORK

Under the bill, property owners own all material and work covered by partial payments, but contractors and subcontractors are solely responsible for caring for and protecting it. The duty of contractors and subcontractors to protect and care for it ends when the owner occupies or uses the work.

FINAL PAYMENT

Within 10 days after construction is completed, the bill requires all contractors and subcontractors to be paid under the terms set by the contract upon the presentation of (1) a properly executed release and duly certified voucher for payment; (2) any required release of all claims and claims of lien against the owner arising under the contract, other than by the contractor, as may be specifically excepted by the contractor or subcontractor from the operation of the release in stated amounts to be set forth in the release; and (3) proof of completion of the contract.

DISPUTES

In any dispute between an owner and a contractor or subcontractor regarding work performed or materials supplied, the bill permits the owner to retain only an amount he reasonably calculates to cover the cost to correct the deficiency. The owner must place the money retained in an escrow account for the contractor or subcontractor’s benefit and keep it there until the dispute is resolved.

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