M E M B E R S H I P Associated Subcontractors of Massachusetts

Transcription

1 M E M B E R S H I P GETTING PAID in Massachusetts Provided as a courtesy to ASM Members Associated Subcontractors Associated Subcontractors of Massachusetts of Massachusetts 31 State Street 4th Floor Boston, MA fax mail@associatedsubs.com

2 Getting Paid in Massachusetts PLEASE NOTE: The FIRST SECTION of this Manual includes an excellent summary of the Massachusetts Lien Law, which applies to private work; and the Payment Laws that apply to Public Work. See the index on the next page for details on what is covered. The SECOND SECTION includes a brief summary of the Massachusetts Prompt Pay Law (enacted 2010) and the Massachusetts Retainage Law (enacted 2014), which both apply only to private work.

3 MASSACHUSETTS PAYMENT LAWS CORWIN & CORWIN LLP 600 Unicorn Park Drive 2nd Floor Woburn, MA TEL: SECTION ONE: MASSACHUSETTS PRIVATE PROJECTS I. Mechanic s Liens II. III. IV. Who May File a Lien A. Written Contract B. Subcontractors and Suppliers What May be claimed A. Labor B. Materials C. What Type of Project How is The Lien Claimed A. What to File i) Notice of Contract ii) Notice of Identification iii) Statement of Account B. When to File i) Notice of Contract ii) Statement of Account C. Where to File D. Who may File V. How Is The Lien Enforced A. Action in Court B. Summary Proceeding VI. VII. What May The Claimant Recover What Are The Practical Considerations SECTION TWO: MASSACHUSETTS PUBLIC PROJECTS I. Payment Terms II. Demands for Direct Payment III. Payment Bonds IV. Retainage 1

4 SECTION THREE: ATTACHMENTS I. Chart Summarizing Massachusetts Lien Law II. III. Chart Summarizing Bond Claim Requirements on Public Projects Forms and Instructions for Direct Payment on Public Projects 2

5 MASSACHUSETTS PRIVATE PROJECTS I. MECHANIC S LIENS By statute (Mass. General Laws c. 254) which was amended in 1997, almost every general contractor, subcontractor and supplier on private building construction in Massachusetts has a right to a mechanic's lien to secure amounts due for labor and materials furnished. A mechanic's lien is simply a security interest in the property comprising the project that secures the payment of amounts due those who furnished labor and materials in construction of the project. Once established, the mechanic's lien acts much like any other lien or encumbrance, such as a mortgage or attachment. If taken to conclusion, the court can order the sale of the property at auction, subject to prior encumbrances, and the lien creditors will share in any proceeds. Frequently, the mechanic's lien is the only security available. And because of the unique nature of the construction process, security is particularly important. Those furnishing labor or material must pay for that labor and material before they can even requisition for payment for themselves. By the time they receive actual payment, they typically have furnished approximately one month's work before the requisition and another month's work before payment is received for the previous month's work at any given time, they may have incurred costs for as much as two months work without payment. And when the general contractor, subcontractor or supplier finally receives payment, it is usually no more than 90% of the amount owed, with 10% retainage withheld until some further date. It is easy to see, therefore, why the ability to claim a mechanic's lien is so important. But 3

6 because of the complexity associated with mechanic's liens, or the fear of upsetting relations with the owner or general contractor, many never invoke that security. Many others do so only when a loss is apparent, which is often too late to obtain mechanic's lien protection. II. WHO MAY FILE A MECHANIC S LIEN A. Written Contract The general contractor, subcontractor or supplier must have a written contract in order to claim a lien. The statute in effect prior to 1997, however, did not define what constitutes a "written contract" and the courts construed the term strictly. For example, there was some question as to whether an unsigned written contract could form the basis for a lien claim, even though both parties recognized the document as binding and performed in accordance with its terms. Likewise, the court held that a "requirements contract" under the UCC would suffice, but a continuing series of purchase orders from a supplier was not a single written contract under the lien law. The statute now defines a "written contract" as "any contract in writing enforceable under the laws of the Commonwealth". C.254, 2A. Although necessarily not specific, this broad definition should lead to more liberal interpretation of the term and include within the lien law many agreements that were enforceable under the prior statute. B. Subcontractors And Suppliers Subcontractors furnish labor or both labor and materials. Suppliers do not furnish labor. The current statute has expanded the definition of suppliers to include more than just "materials". It now includes "rental equipment, appliances or tools". C.254, 4. First tier subcontractors (those contracting directly with the party contracting with the owner, i.e. the general contractor) may file a lien, as may first tier suppliers. The rights of 4

7 second tier subcontractors and suppliers remains less clear. Older case law and analogous payment bond cases suggest that a subcontractor or supplier to a subcontractor at any tier may file a lien. But a subcontractor or supplier to a supplier at any tier may not. This is consistent with the wording of the statute and with the logic of limiting security in the project to those within one tier of physical contact with the project. III. WHAT MAY BE CLAIMED ON A MECHANIC S LIEN A. Labor A lien may be claimed for traditional labor. The statute also now includes "construction management services for both contractors and subcontractors." C.254, 2 and 4. This removes any question that supervision and general conditions are also covered. B. Materials All materials specially fabricated for or incorporated into the project may be the basis of a lien. This includes rental equipment, appliances or tools. C. 254, 2 and 4. C. What Type Of Project The type of project subject to liens includes all improvements to real property. C.254, 2 and 4. Thus general contractors, subcontractors and suppliers may secure liens for labor and materials furnished on projects such as golf courses, landscaping, parking lots, roads for subdivisions and underground utilities and tanks. A lien may attach to less than the landowner s interest. Prior to 1997, liens claimed on tenant fit-up projects frequently proved troublesome to the lessor or its lender. The statute now, however, expressly provides the "owner" may be of "a lot of land or other interest in real property. C.254, 2 and 4. It is now clearer that a lien for labor and materials furnished to a lessee attaches to the leasehold interest, not the lessor's title. 5

8 III. HOW IS THE MECHANIC S LIEN CLAIMED A. What To File I) Notice of Contract. A lien is claimed by filing a Notice of Contract, the forms for which are contained in the statute. C. 254, 2 and 4. The purpose of this is to provide notice to the world that a contract for furnishing labor and materials exists for the project. The form for general contractors is similar to the form for subcontractors and suppliers, but with one significant difference. The form for subcontractors and suppliers requires a summary statement of the account at the time the notice is filed. The summary is not intended to be a binding or final statement of claim. Its purpose is simply to advise the owner, lender, and often the general contractor, as to the approximate amount of the lien exposure. That information, can be very useful to those interested persons in determining how they will respond to a Notice of Contract filed by a subcontractor or supplier (see discussion under Practical Considerations). Subcontractors and suppliers are required to provide actual notice of that filing to the owner before their lien becomes effective. C. 254, 4. The lien claimant, therefore, must send a copy of the filed Notice of Contract to the owner by certified mail return receipt requested immediately after filing it in the Registry of Deeds. ii) Notice Of Identification. The Law also adds an additional step which should be taken by all lower tier sub-subcontractors and suppliers. That group of claimants must provide the general contractor with a notice identifying themselves and their work within 30 days of starting their performance. C. 254, 4. If they provide that notice, their lien security will be the same as direct subcontractors and suppliers (the amount unpaid on the general contract when their Notice of Contract is filed). If they do not file the Notice of Identification within the 30 6

9 days, they do not lose their lien rights, but their lien security is limited to the unpaid balance of the contract between the general contractor and the direct subcontractor at the time their Notice of Contract is filed. For example, if the general contractor paid the subcontractor in full at the time the Notice of Contract is filed, and there is no Notice of Identification, the claimant's lien has no value. The statute provides a form for Notice of Identification, but it is expected that if the subsubcontractor's or supplier's purchase order or invoice contains all the necessary information, a copy of that document sent to the general contractor within the 30 days should suffice. It is important to note that this document is not filed in the Registry of Deeds, so the subsubcontractor or supplier does not need any legal assistance to preserve its security to the full extent of a direct subcontractor's or supplier's lien. iii) Statement Of Claim. The second step in enforcing a mechanic's lien (after filing the Notice of Contract) involves filing a true and accurate Statement of Account setting forth the amount due for contract and extra work less any payments and credits. C. 254, 8. This form, however, is not in the statute. B. When To File Under the statute prior to 1997, a mechanic's lien was claimed by filing a Notice of Contract in the Registry of Deeds on or before the original contract completion date. This made the statute difficult to use because this deadline frequently passed long before the claimant could decide whether to file, and sometimes even before its work commenced. Under the present statute, the deadline for filing is tied to the date the project is substantially completed in the field (except where the general contractor is terminated before substantial completion). The date of the project substantial completion (or termination) may be established by a notice filed by the 7

10 owner and general contractor in the Registry of Deeds. C. 254, 2A, 2B. Under this approach, the completion date stated in the contract no longer has any relevance to acquiring or enforcing a mechanic's lien, and the numerous older cases discussing this are no longer relevant. i) Notice Of Contract. General contractors, subcontractors and suppliers may file a Notice of Contract as soon as their contract is signed. They may file before any work is performed or any time during performance. They may also file as late as 60 days after the owner and general contractor file a Notice of Substantial Completion of the entire project in the Registry. If the owner terminates the general contract before the substantial completion, the claimant may file its Notice of Contract within 90 days after the owner files a Notice of Termination in the Registry. If a Notice of Substantial Completion or a Notice of Termination is not filed, the claimant may file its Notice of Contract as late as 90 days after the general contractor or any subcontractor, working for the general contractor last furnished labor, materials or equipment. C. 254, 2 and 4. ii) Statement of Account. The time for filing the Statement of Account, like the Notice of Contract, is also tied to the date of substantial completion or termination. Usually that statement is filed after the claimant completes its work. But it must be filed no later than 90 days after the owner and general contractor file the Notice of Substantial Completion; or no later than 120 days after the owner files a Notice of Termination; or, if neither notice is filed, within 120 days after the last work is performed by anybody. C. 254, 8. Failure to file this Statement of Account by these statutory deadlines results in automatic dissolution of the lien. Of course there is no necessity to wait for these deadlines to approach. The most sensible practice is for the claimant to file the Statement of Account as soon as its work is complete, or immediately after learning of the termination of the general contract. To avoid confusion about early filing, the 8

11 statute also expressly provides that the Statement of Account may be filed prior to the filing or recording of the Notice of Substantial Completion or Notice of Termination. C. 254, 8. Because the various deadlines for establishing and enforcing a mechanic's lien are now tied to the date either the Notice of Substantial Completion or Notice of Termination is filed, subcontractors and suppliers need to know when that happens (the general contractor will already know because it must agree to the substantial completion date and it will be the first to know if its contract is terminated). The statute addresses this need by requiring the owner and the general contractor to provide actual notice to most subcontractors and suppliers. C. 254, 2A, 2B. First, the owner is obligated to notify every subcontractor and supplier who has filed a Notice of Contract. Second, the general contractor is required to notify those subcontractors and suppliers with whom it has a direct written contract. Third, the general contractor is required to notify all lower tier sub-subcontractors and supplier who previously sent the general contractor a Notice of Identification. The only deadline that could prove tricky is one triggered by the owner terminating the general contract long before substantial completion. But anyone paying attention should get wind of a termination even without actual notice. And even if news of that termination is slow in arriving, the deadline for filing a Notice of Contract does not occur until 90 days after the Notice of Termination is filed; and the deadline for filing the Statement of Account does not occur until 120 days after the Notice of Termination is filed. Even though claimants may wait to assert their lien, filing a Notice of Contract early in the job is always an advantage because it increases the amount of security provided by the lien. The lien security of subcontractors and suppliers is limited to the balance remaining unpaid on the general contract at the time they filed their Notice of Contract and gave notice to the owner. 9

12 C. 254, 4. The later in the project the subcontractor or supplier files its Notice of Contract, the less the amount unpaid on the general contract, and consequently the lower the payment security afforded by the lien. There is also an additional, and substantial, benefit to early filing by a general contractor. Under the statute prior to 1997, the filing of any Notice of Contract created immediate crisis because the owner's bank immediately halted all further advances on the construction loan, which stopped the project in its tracks. For that reason many general contractors were reluctant to file for a mechanic's lien until the need for payment security became critical. Since 1997 the statute prohibits the lending bank from refusing to advance funds solely because a general contractor files its lien, so long as the general contractor provides a statutory partial waiver and subordination of lien form. C. 254, 33. That waiver and subordination allows the bank to keep its priority ahead of the general contractor for loan proceeds advanced by the bank after the general files its lien, except for retainage on which the general contractor acquires the priority right. This arrangement allows the bank to continue funding the project, and permits the general to assess its payment position each month before providing any waiver or subordination. That moderate concession in a general contractor's lien security is outweighed by the benefit in added security most general contractors will enjoy by filing their liens early in the job. In addition, the waiver and subordination is only effective for the 25 days following the date through which payment was due (c. 254, 32), therefore, it has the added benefit of encouraging prompt payment. There is an exception to the prohibition against the lending bank refusing to advance funds over a general contractor's Notice of Contract. Small residential projects (defined as one to four units) are exempt from this prohibition. C. 254, 33. Lenders can stop funding on these projects upon the filing of a Notice of Contract by a general contractor, but they are not required 10

13 to do so. If the lender ceases funding, the procedure would be same as with regard to subcontractors and suppliers. However, if the lender chooses to accept the partial waiver and subordination of lien form on such projects, the result would be the same as on larger commercial project. C. Where To File All applicable documents are filed or recorded in the Registry of Deeds in the County or Registry District where the land lies. C. 254, 2A, 2B, 4, 5, and 8. D. Who May File The statute expressly provides that the various documents relating to the mechanic s lien are signed before a notary by "a person purporting to hold the position of president, vice president, treasurer, clerk, secretary, or any assistant to the foregoing, principal, partner, proprietor, trustee, attorney or other similar position, of the entity entitled to record or file such instruments on behalf of such entity acting in its own capacity or as a general partner or coventurer, or as assignee, agent, or authorized representative." This specific list should eliminate any further confusion. V. HOW IS THE LIEN ENFORCED A. Action In Court The third step in enforcing a mechanic's lien is to file a timely court action. The court action must be filed within 90 days after the Statement of Account is filed. C. 254, 5 and 11. An attested copy of the complaint, which starts the court action, must also be filed in the Registry of Deeds within 30 days after the court action is commenced. C. 254, 5. The civil action is filed in the Superior Court for the county where the land lies or in the District Court in the judicial district where the land lies. C. 254, 5. 11

14 The statute allows any party in interest (i.e., the owner, general contractor or subcontractor) to file a lien bond. The lien bond can cover the entire project ( 12), or it can dissolve a specific lien ( 14) filed by a general contractor, subcontractor or supplier. In these instances the claimant s court action is against the lien bond surety. B. Summary Proceeding The statute also seeks to assure efficient court enforcement of procedural requirements governing lien eligibility. It expressly allows the court to quickly resolve procedural disputes and to clear the record of liens that are either invalid or unenforceable. C. 254, 15A. The ability on short notice to clear the record of improper or dissolved liens facilitates the flow of funds and avoids the unnecessary posting of bonds. Interested persons should not have to spend countless legal hours convincing the courts they have a right to speedy resolution of such disputes instead of waiting for a trial some two years later. VI. WHAT MAY THE CLAIMANT RECOVER Subcontractors and suppliers retain a priority security interest ahead of bank loan advances from the moment they file their Notice of Contract. C. 254, 7(c). It is expressly against public policy to require a subcontractor to waive or subordinate its lien and any agreement purporting to bar the subcontractor from filing a Notice of Contract or from taking any steps to enforce a lien is unenforceable. C. 254, 32. A subcontractor s lien attaches to any sums due or to become due to the general contractor at the time the subcontractor gives written notice to the owner of the filing of the Notice of Contract. This means that the owner s liability to a subcontractor filing a lien can not exceed the unpaid balance of the general contract. 12

15 A recent court decision highlighted the importance of claimants not waiting until the end of a job to file a lien since the amount of security (the value) provided by the lien may diminish. Again, the statutory test as to the limit of liability of an owner for a subcontractor s lien is the amount due or to become due the general contractor. In that decision a general contractor abandoned the project before the work was substantially complete. After the abandonment subcontractors filed timely notices of contract. It was undisputed that the general contractor abandoned the project, there was an unpaid balance on the general contract, the owner paid in excess of the amount of the unpaid balance to complete the general contract work and the subcontractors were owed balances from the general contractor at the time each filed its notice of contract. The court found that even though the subcontractors liens were timely filed, the liens had no value since the general contractor s abandonment was wilful default that terminated the general contractor s right to further payment from t he owner including any retention on periodic payments. The court stated that value of any lien is determined by the amount due or to become due the gernal contractor at the time a subcontractor files its notice of contract. Here there were no funds due or to become due the general contractor at the time the subcontractors filed their notices of contract and the liens had no value. This is a vivid example of subcontractors waiting too long to file a Notice of Contract. Even though it may be impossible to determine in advance that a general contractor intends to abandon a project, there are usually signs, such as late or reduced payment on a periodic requisition, which should warn a subcontractor to beware and to take advantage of its statutory right to payment protection. If a subcontract files a Notice of Contract, any prudent owner will make sure the subcontractor receives payment before making further payments to the general 13

16 contractor. And the owner who pays the general contractor without making sure the subcontractor is paid may still have liability to the subcontractor filing the Notice of Contract. The statute also expressly provides that the proceeds of a lien foreclosure sale should be distributed among lien creditors in proportion to the amount due each "regardless of the date upon which each such lien creditor filed a Notice of Contract." C. 254, 21. The logic is that where there is not enough equity to satisfy all lien claimants, those whose work occurs earlier in the project should not gain advantage over those whose work occurs later. In short, the painter should recover in the same proportion as the foundation subcontractor. There is a substantial difference, however, with regard to lien priority for general contractors. As stated previously, general contractors are permitted to partially waive and subordinate their liens, in exchange for which lenders are obligated to continue funding. Consequently, general contractors may not have absolute priority to any advances made after filing a Notice of Contract. Provided the contractor is paid within 25 days after the last day of the payment period stated in the waiver, the general contractor will retain priority over subsequent advances by the lender only to the extent of the retainage stated in the waiver form. C. 254, 7(b). This priority, however, is maintained throughout the duration of the project and relates back to the date of the filing of the Notice of Contract. Therefore, if the general contractor files its Notice of Contract prior to the disbursement of any funds by the lender, it will retain an absolute priority over the entire mortgage to the extent of its retainage. And while the general contractor will have subordinated its lien to secure payment of unpaid, agreed or pending change orders and disputed claims, and for labor and materials furnished within the 25 day period after the payment period, it will retain priority for those items as well if the general contractor does not receive payment within the 25 day period. 14

17 VII. WHAT ARE THE PRACTICAL CONSIDERATIONS The filing of a Notice of Contract by a general contractor has historically been viewed as a hostile act by owners and lenders. This was largely due to the fact that lenders typically would cease funding once the Notice of Contract was filed which creates significant animosity. Consequently, general contractors were reluctant to file Notices of Contract except where they had good reason to do so, and this was in turn viewed as an insult to the owner. The procedures under the present lien law were intended to change that perception and make the filing of a Notice of Contract by a general contractor more of a routine event. This is true in numerous other states, and may well become true in Massachusetts. If so, there is significant incentive for lenders to make sure that general contractors are paid what they are due, particularly retainage which will be superior to the lender's mortgage, and are paid those amounts promptly. That only benefits the construction industry as a whole. To the extent that owners and lenders remain uncomfortable about 2 liens, they may want to consider monitoring practices that have a tendency to promote their filing. For example, construction lenders frequently ask general contractors to consent to the owner's assignment of the construction contract to the lender. These consents typically include an acknowledgment by the general contractor that it will never seek from the lender any amounts the general contractor is due for labor and materials incurred prior to the lender's exercise of the assignment. Since a lender generally would not exercise an assignment if the owner were solvent, there is a substantial risk that the general contractor will not have been paid for amounts already earned. Therefore, such a consent would encourage a general contractor to claim a mechanic's lien early on. Owners and lenders might also consider the amount of retainage they require withheld 15

18 from payments to the general contractor. The greater the retainage withheld, the more likely the general contractor will want to avail itself of the priority gained for retainage by an early Notice of Contract filing. Finally, both construction lenders and owners may want to reconsider the frequent refusal to pay for materials which are stored but not yet installed in the project. Often these are a substantial expense for the contractor, and if they will not be installed for some time, the filing of a Notice of Contract is prudent. The filing of a Notice of Contract is useful to a subcontractor or supplier as much for the reaction it provokes as the security it provides. Because any disbursements made by the construction lender after the filing of a subcontractor or supplier Notice of Contract are subordinate to the lien created, the typical response from the lender is to cease funding until the lien has been either dissolved or bonded. Naturally, when all funds cease flowing from the lender to the owner and from the owner to the general contractor, the subcontractor or supplier who has filed the Notice of Contract has everyone's undivided attention. While general contractors felt that it was more important to be able to file a completely "non-hostile" lien in exchange for what is essentially a monthly subordination of priority, subcontractors and suppliers disagreed. This is because the general contractor receives an amount of money roughly equivalent to the disbursement it is waiving or subordinating to, but the subcontractor or supplier would be receiving only a small portion and subordinating to the entire amount. Moreover, in the absence of their ability to maintain priority, a subcontractor's or supplier's lien, if subordinated and funded over, would be completely ignored and would only serve to delay, not accelerate payment. Once the Notice of Contract is filed, the subcontractor or supplier can expect to be subjected to a significant pressure to immediately 16

19 dissolve it. This pressure may range anywhere from threats to withhold payment forever to refusing to employ the subcontractor or supplier on another project, to asserting a backcharge to pay the premium necessary to bond off the subcontractor's or supplier's own lien. On the other hand, more reasonable and law abiding general contractors, owners and lenders may recognize the subcontractor's or supplier's statutory right to its mechanic's lien and respond with something more acceptable. For example, if a payment is due, the general contractor may propose to make that payment in exchange for a dissolution. Since a new Notice of Contract may be filed later, this may prove to be the easiest solution. If no payment is yet due (one need not be owed money to be entitled to a lien for labor or materials to be furnished), the lender and owner may withhold from payment to the general contractor an amount sufficient to make payment when it becomes due. Finally, the statute provides that any party in interest may file a bond which dissolves the lien of record (thereby eliminating any problems with regard to the lender's priority) and substituting the security of the surety for the project itself. C. 254, 14. Also, a recent appellate court decision affirmed the right of a contractor or subcontractor to file a second notice of contract after it had withdrawn a previously filed notice of contract, if the second filing was timely. This means that if a general contractor or subcontractor files and then withdraws a notice of contract early in a job, the sub or general can file again later in the job. In many jobs, a party will file a Notice of Contract when a periodic payment is late. The filing of the notice usually results in the owner or general contractor making payments unless there is an insolvency. It appears that there is no limitation on the number of times a general contractor or subcontractor may file for lien protection, and therefore it can be used for periodic payments and final payment. Finally, under the current statute, liens asserted by subcontractors and suppliers are less 17

20 likely to result in a cut off of funding. The statute requires subcontractors and suppliers to include a summary of the account in their Notice of Contract, which enables the lender, owner and general contractor to more easily assess their exposure. They may decide that the size of the potential lien does not warrant any dramatic action and the approximate extent of lien exposure is well known before the claimant filed its Statement of Account. Furthermore, the summary makes it easier for the general contractor or owner to relieve the lender of risk by filing a bond, since it will now know immediately the penal sum of the bond needed. Therefore, it is more likely that a subcontractor or supplier asserting its lien will either be paid or provided alternative payment security in the form of a bond, as compared to a bank stopping further advances. 18

21 MASSACHUSETTS PUBLIC PROJECTS I. PAYMENT TERMS G.L. c. 30, 39K governs periodic payments to general contractors on building projects. For contracts with the Commonwealth and housing authorities, payment must be made within 30 days after the awarding authority receives the general contractor s requisition, provided it is accurate and otherwise correct. For contracts with other awarding authorities, payment must be made within 15 days after receipt of the general contractor s requisition. G.L. c. 30, 39F governs payments to certain subcontractors by the general contractor, as well as direct payments by the awarding authority. Three types of subcontractors are covered: (1) filed sub-bidders under c. 149, 44A-J; (2) all other subcontractors on building and nonbuilding projects who are approved by the awarding authority in writing as a person performing labor or both performing labor and furnishing materials pursuant to a contract with the general contractor ; and (3) suppliers on non-building state projects who contract with the general contractor for more than $5,000 worth of materials. The statute provides that forthwith after receiving a periodic payment from the awarding authority, the general contractor shall pay to each subcontractor the amount received for labor and materials furnished by that subcontractor, less any amount claimed due by the general contractor (backcharges), and less any amount ordered not to be paid by a court. In order to put teeth into this requirement for prompt subcontractor payment, the statute further provides that payments to a general contractor for a subcontractor s work shall be made to the general contractor for the account of the subcontractor, and that the awarding authority 19

22 shall take reasonable steps to compel the general contractor to make each such payment to each such subcontractor. II. DEMANDS FOR DIRECT PAYMENT On Massachusetts public building projects, subcontractors who file sub-bids or who are approved in writing by the public owner are eligible under M.G.L. c. 30, 39F to receive direct payments from the awarding authority for work they perform. An eligible subcontractor may demand both direct periodic and final payments. Direct periodic payment may be sought where the general contractor obtains payment on account of the subcontractor's work and does not pass it along, or where the general contractor fails to include the subcontractor's work in its application for payment to the awarding authority. A direct final payment may be sought if the subcontractor does not receive payment within seventy days after it substantially completes. The procedure for demanding direct payment is simple. A subcontractor need only send a letter to the public owner stating a detailed breakdown of the balance due under its subcontract and the status of subcontract completion, and send a copy of the letter to the contractor. The letter must be sworn to and notarized, and must be sent by certified mail to the awarding authority and the general contractor. The procedure by which a general contractor may object to the awarding authority making a direct payment is equally simple. If the general contractor disputes the subcontractor's claim, it need only send a letter to the awarding authority within ten days stating its detailed breakdown of the subcontract balance. The general contractor's breakdown, like the subcontractor's, must be sworn to and notarized. If the general contractor does not dispute the subcontractor's breakdown within ten days, then the awarding authority is obligated to pay the subcontractor its balance, less any amount the awarding authority is withholding for incomplete 20

23 subcontract work. If the general contractor disputes the entire balance claimed due, the awarding authority is statutorily obligated to deposit the entire balance into an interest bearing joint bank account in the name of the general contractor and the subcontractor. The bank must hold those funds until it is notified of a settlement between the general contractor and subcontractor, or receives a court order directing payment to one of the parties. If the general contractor disputes only part of the balance, then the awarding authority must pay the subcontractor the admitted balance, and deposit the disputed balance into an interest bearing joint account. All direct payments to subcontractors and all deposits of disputed balances into joint bank accounts come exclusively from amounts held by the awarding authority that are otherwise payable under the general contract. To the extent there are funds due or to become due under the general contract and the awarding authority makes a direct payment or deposit, the entire amount paid or deposited is credited against the general contract price and deducted from future payments to the general contractor. If no amount is due the general contractor when the subcontractor's demand for direct payment is filed, and no amount later becomes due, then the awarding authority has no fund out of which it can make a direct payment or deposit, and is under no obligation to the subcontractor to take any action. But if the awarding authority ignores a subcontractor's demand for direct payment where there are amounts remaining under the general contract, and continues to pay the contractor, that awarding authority may be responsible for the subcontractor's balance even though the awarding authority no longer holds general contract funds. The direct payment statute benefits subcontractors because it provides a means of facilitating payment where the general contractor withholds payment without grounds. The 21

24 ability to make direct payments to subcontractors, and charge those payments against the general contract price, benefits the awarding authority because it enables an awarding authority to keep payments flowing to subcontractors and to avoid possible work stoppages. Direct payments do not harm general contractors because they are limited to payments otherwise due subcontractors, and, where no amounts are due, the general contractor may prevent a direct payment through a timely response. Any abuse of the direct payment statute by a subcontractor making a false claim or a contractor making a false objection is subject to severe economic penalty. A Massachusetts statute (M.G.L. c. 266, 67B) makes it a felony for a contractor or subcontractor to knowingly make or present a false claim to a public owner. A person convicted of violating that statute faces a $10,000 fine or five years in state prison, or both. A criminal conviction for making or presenting false claims on a public project may involve the most severe penalty, but it is not the only penalty the law inflicts. Under M.G.L. c. 12, 5B a contractor or subcontractor convicted in a criminal proceeding on a false claims charge, faces additional civil penalties, including another fine of $10,000, plus triple any damages incurred by the public owner, plus all expenses of the court action including legal fees, expert fees and investigative costs. That's not all. Under M.G.L. c. 29, 29F a contractor or subcontractor convicted on false claim charges will almost certainly be debarred from bidding or otherwise participating in public construction projects. In short, a contractor or subcontractor caught in the legal web of making or presenting false claims is on the fast track to ruin. III. PAYMENT BONDS Because there is no right to secure a mechanic's lien against public property, Massachusetts law requires that payments due subcontractors and suppliers on public projects be 22

25 secured by surety bond. The awarding authority on every public project costing more than $5,000 must require the prime contractor to furnish a payment bond for the benefit of subcontractors and suppliers providing labor or materials to the Project. The prime contractor is the only party whose payments are not secured by bond. However, the prime contractor has the security of dealing with a public authority that is supported by taxes and is unlikely to run out of money. The coverage provided by payment bonds on public projects, and the conditions for recovering against them, are controlled by M.G.L. c. 149, 29. If any such payment bond contains provisions more restrictive than the statute, those provisions will be ignored. It is the statute, not the bond provisions, that governs recovery on the payment bond. Under c. 149, 29, every subcontractor is entitled to payment bond coverage no matter how far down the ladder from the prime contractor. Thus a subcontractor to a subcontractor to a subcontractor has bond coverage. Any material supplier to any level of subcontractor also has bond coverage. The only material suppliers not eligible under the statutory payment bond are those that furnish materials to other material suppliers who perform no labor at the Project. The c. 149, 29 payment bond secures payment for all labor and materials used or employed in the Project. In addition, it covers lumber that is used but not incorporated in the Project, such as concrete forms; it covers specially fabricated materials ordered for the Project even if those materials ultimately are not used, so long as timely notice of the order was provided to the prime contractor; it covers transportation charges, but only for materials consigned to the prime contractor or a direct subcontractor; it covers rental equipment; and it covers transportation for rental equipment. The conditions established by c. 149, 29 for recovery on the bond create two classes of 23

26 bond claimants. The first class are those subcontractors or material suppliers who have a direct contract with the prime contractor; and the second class is everybody else. Those having a direct contract with the prime contractor need only file suit on the bond within one year of completing their performance to recover against the bond. Those claimants having no direct contract with the prime contractor must send written notice of their claim to the prime contractor by certified mail within 65 days of completing performance, and file suit against the bond within one year of completing. The conditions for bond recovery by both classes of bond claimants are easy to satisfy, but crucial. Any failure of notice, where required, and any failure to file suit on time defeats a bond claim. The loss of bond coverage may prove devastating. First, the bond secures payment of amounts due. A judgment against a commercial surety should be collectible; but a judgment against a general contractor or subcontractor may not be collectible and thus the surety may be the only avenue of recovery. And second, under c. 149, 29, any judgment against the payment bond surety must include an award of attorney's fees to the subcontractor or supplier. This is a huge advantage because litigation is expensive and getting attorney's fees paid by the surety allows the bond claimant to recover the principal debt without deduction for substantial collection costs. Also, the threat of having to pay attorney's fees encourages many bond sureties to settle at an early stage. Failure to meet conditions for recovery on the c. 149, 29 bond results in a loss of payment security, a loss of attorney's fees incurred, and a loss of leverage to force an early settlement. A brief word on federal projects. Like state public projects, federal projects require the general contractor to provide a payment bond to secure payments to subcontractors and suppliers. The governing federal statute is called the Miller Act. While similar in some respects 24

27 to state law, the Miller Act has some significant differences which affect the scope and availability of bond security on federal projects. The Miller Act affords bond protection to two categories of claimants. The first is everyone providing labor and/or material under a direct contract with the general contractor. The second category is anyone providing labor and/or material under a contract with a direct subcontractor to the general contractor. The key word here is subcontractor. Anyone providing labor and/or materials to a mere supplier to the general contractor has no bond protection. Also eliminated from bond protection on federal projects are those subcontractors or suppliers working for sub-subcontractors. None are covered under the Miller Act bond. This lack of bond protection for lower tier subs and suppliers stands in sharp contrast to the Massachusetts public bond statute which secures anyone furnishing labor or material to any sub-subcontractor no matter how far down the ladder. To recover against the Miller Act payment bond, a claimant having a direct contract with the general contractor need only file suit on the bond within one year after completing its contract work. A claimant having a contract with a subcontractor must provide written notice of its claim to the general contractor within 90 days of completion by the subcontractor and also file suit within one year. The written notice must be sent by any means which provides third party verification of delivery such as certified mail, U.S. Express Mail, Federal Express, UPS, or the equivalent. Completion under the Miller Act means initial completion before receipt of punchlists. The federal courts generally do not consider corrective or repair work in determining the allowable period for notice or filing suit under the Miller Act. It is important on federal projects to keep a sharp eye on when your work is billed 100% because such a billing could trigger the 25

28 notice period even if corrective work is performed later. This is another significant departure from state bond requirements which permit notice based on corrective work performed after initial completion. Before performing work on a federal project, every bond eligible subcontractor or supplier should verify with the federal agency that the general contractor has provided the payment bond required by the Miller Act. There have been several cases where federal agencies have permitted the general contractor to proceed without providing the Miller Act payment bond. In those instances subcontractors and suppliers have been left without payment security because courts have denied recovery against the federal agency that failed to require the bond. The point is that subs and suppliers on federal jobs only have payment security if the general contractor provides the Miller Act bond. Be sure that bond exists before starting work. When filing a suit to recover on the Miller Act bond, a subcontractor or supplier must sue in the United States District Court in the district where the contract is performed, and must sue in the name of the United States for the use and benefit of the party suing. This last requirement is a formality and does not require any government consent. IV. RETAINAGE The purpose of retainage is to assure completion. The retained amount gives the owner security in the event the contractor or subcontractor refuses to fully complete its work. At the same time, receipt of that retained amount provides the contractor or subcontractor some incentive to get the last punchlist items finished. The problem comes when an owner (or contractor) insists on excessive retainage or tries to hold it too long. Contractors and subcontractors are not bankers and should not be required to finance construction. That's the result when excessive retainage is withheld indefinitely because retainage represents payment for 26

29 work already completed. In the long run, excessive retainage drives up the price of construction to reflect increased financing costs incurred by contractors. In the short term it impedes the cash flow of contractors and subcontractors struggling to remain competitive. In some instances it can spell ruin. On public projects in Massachusetts the problem is addressed by statutes governing payments. Retainage is limited to 5% on the general contract and on filed subcontracts. And the public owner must release retainage held on that subcontract work within 65 days of each subcontractor reaching substantial completion, and must release the general contractor's retainage within 65 days of substantial completion by the general contractor. The general contractor is statutorily required to pay subcontractors' retainage immediately after receipt from the owner. The only amount that may be withheld following substantial completion of subcontract and general contract work are amounts equal to the value of any claims or remaining punch list items. This statutory procedure requires release of retainage piecemeal as the work gets completed, rather than in one lump sum long after most of the major components of the project are fully complete. On private work, retainage serves the same purpose as on public work, to provide security that the work will be completed to the owner s satisfaction. Until 2014, there were no laws governing retainage on private work. Today, retainage is subject to the provisions of M.G.L. c F, enacted in 2014 thanks to the efforts of the Associated Subcontractors of Massachusetts. Under the law, which took effect in November of 2014, retainage is limited to 5% on all contracts governed by the Mechanics Lien Law where the total prime contract value is at least $3 million. It does not apply to residential projects of 4 units or less. In addition to limiting the retainage hold back to no more than 5%, the Retainage Law 27

30 sets up a clear process and timeline for establishing substantial completion, closing out the project, and releasing retainage funds. The new and highly detailed close-out process is designed not only to speed the payment of retainage to contractors and subcontractors, but also to accelerate the final completion of the work and submission of all deliverables. You will find a detailed summary of the Retainage Law at the end of this section. On private projects under $3 million, which are not subject to the Retainage Law, retainage remains a matter of negotiation. But the objective should be the same to limit retainage to its proper purpose of securing completion, and to insure prompt payment to contractors and subcontractors following completion of their work. Because retainage functions as a form of completion security, the retained percentage should reflect other available security. Where the contractor or subcontractor provides a performance bond guaranteeing completion, the need for retainage is substantially reduced and the retained percentage should be lower than where no bond is provided. In that circumstance, it should never exceed 5% and should perhaps be lower. On projects under $3 million, subcontractors are not able to influence the percent retained by the owner under the general contract, but should limit retainage under their subcontract to an amount no greater than that withheld by the owner from the contractor. Except where a subcontractor is un-bondable, it is unfair for a general contractor to hold retainage on a subcontractor in excess of that being withheld by the owner on account of the subcontractor's work. This could happen if the general contract requires only 5% retainage while the subcontract provides for retainage of 10%; or if the general contract provides for reduction of retainage when completion reaches a certain point, while the subcontract contains no provision for reduction. In both circumstances the contractor gets free use of money earned by subcontractors. 28