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New Mexico Retainage Act.

Starting June 15, 2001, almost all commercial construction projects within New Mexico became subject to the recently enacted retainage act. The retainage act sets out specific requirements for the handling of funds retained by the project owner or contractor during the course of a construction project. The retainage act additionally sets mandatory deadlines for payment of progress payment funds applicable to the owner, contractor and all tiers of subcontractors and suppliers.

Scope

The act, which became effective June 15, 2001, contains a broad definition of construction services and is applicable, to both public and private construction projects. The only commercial projects that are exempt from the act are projects for the federal government, Native American tribes, and the New Mexico State Highway and Transportation Department. Residential construction projects involving four or fewer dwelling units are also exempt from the terms of the act. If a project does not fall within one of the above identified exemptions, it will be subject to the act, although there are partial exemptions for certain projects as will be discussed below.

Retention Provisions

The most striking provision of the new retainage act is its treatment of monies retained by the project owner or by the prime contractor during construction. A project owner may retain no more than five percent of the cost of estimated work performed and the value of materials stored on the site or suitably stored and insured offsite. Whether or not the project owner withholds retainage, the prime contractor may retain funds, but in no case should the total retention exceed five percent. Funds that are withheld must be deposited into an escrow account with a state or national bank chartered with the state of New Mexico, or a savings and loan association domiciled in New Mexico. No other escrow accounts will comply with the terms of the act. Within the escrow agreement, however, there is substantial discretion as to where the funds will be deposited. The act specifically allows funds to be invested in certificates of deposit or other time deposit instruments, treasury bonds, treasury bills, treasury certificat es of indebtedness or bonds or notes of the state or political subdivision.

As interest is accrued on the retained funds, the escrow to distribute the is paid to the prime contractor. Once it is paid to the prime contractor, the interest earned should be treated as any other progress payment and would be subject to the prompt payment rules discussed below. The escrow agent must additionally provide monthly reports indicating the value of funds held in escrow and any deposits or withdrawals from escrow during the reporting period. Funds held in an escrow account established pursuant to the act are not subject to garnishment, attachment, levy or execution. Similarly, the escrowed funds ate held for the benefit of the project owner and may not be pledged by a contractor or subcontractor other than to its surety.

Withdrawals from escrow are subject to the approval of the project owner. However, the act sets requirements for disbursal of retained funds. Retention must be released pursuant to the act on substantial completion of each separately ascertainable item of the prime contractor's schedule of values. For instance, on a large project, specific deliverables, usually large mechanical units, air handlers, structural steel, etc. may constitute their own item on the prime contractor's schedule of values. If that work has extended over more than one payment period, all retained funds would be required to be released on delivery of the material regardless of where in the project timeline the delivery occurs. On the other hand, bifurcated line items, such dirt work or time-intensive tasks like masonry may extend over multiple payment periods, and retention would not be released until substantial completion of the whole portion of the work.

All fees of the escrow agent are to be paid by the project owner or the prime contractor withholding funds. The cost of setting up an escrow account will vary depending on the financial institution, but present estimates have ranged from $1,500.00 to $3,000.00 depending on the duration of the project.

Any contractor or subcontractor may opt to provide securities in lieu of retention being withheld. The act does not specify the type of security to be offered, and it is presumed that the project owner will be entitled to accept or reject offered securities at its discretion.

If retained funds are not deposited into the escrow account or released from the escrow account upon substantial completion, then an additional interest penalty of one and one-half percent per month or fraction thereof accrues until remedied. There is no automatic enforcement mechanism for the deposit or release of retained funds, but the act does allow for the recovery of attorney's fees and costs incurred in enforcing the terms of the act.

Exceptions to Retention Provisions

There are two exceptions to the retention provisions contained in the act. The largest exception is for construction projects for local public bodies, i.e., cities or counties. Local public bodies may provide in their bid documents how retained funds are to be handled. In all cases, however, the retained funds must, at a minimum, be deposited in an interest bearing account. The provisions for release of retained funds are not subject to the partial exemption for cities and counties. The other exception is for manufacturing plants engaged in at least ten construction projects at the same time. To the best of my knowledge, the only entity capable of qualifying for this exemption is Intel. Any manufacturing plant that does qualify under this exception, however, may serve as its own escrow agent but must follow all of the other rules for retained funds.

Prompt Payment Provisions

The retainage act keeps with only slight modifications of the prior Prompt Payment Act, however, the retainage act is now applicable on private as well as public projects.

The act requires that all construction contracts provide for payment of amounts due, except for retainage within specified time limits. Payment is required from the project owner within twenty-one days after the owner receives an undisputed request for payment. If payment is not received within twenty-one days, then an interest penalty of one and one-half percent applies to all amounts due and owing. While this is the same requirement that has been in effect on public projects in New Mexico for many years, there are no reported decisions enforcing the act. Therefore, it is unclear whether an owner may simply declare that an invoice is disputed and withhold payment. The more probable construction is that the act's reference to an undisputed request for payment refers to an improperly completed request for payment. Upon receipt of an improperly completed request for payment, the owner must notify the prime contractor within seven days of receipt, but the twenty-one day deadline for payment does not begin until a properly completed invoice is submitted. Payment may be made only by first-class mail, hand delivery or electronic funds transfer.

Once payment is made by the project owner, the prime contractor has seven days to make payment to its subcontractors and suppliers. The seven-day payment requirement is applicable to all tiers of subcontractors and suppliers. If the prime contractor or any subcontractor or supplier fails to make payment to its subcontractors or suppliers within seven days of receipt of payment, then an interest penalty of one and one-half percent per month or fraction thereof will apply to the outstanding amounts due. While it is not clear from the terms of the act, this interest penalty may be in addition to any interest provided by contract.

A simple example of the prompt payment requirements would look like this:

15 days Work performed or materials supplied

21 days Invoice submitted

7 days Payment by owner

7 days Payment by prime

7 days Payment by 1st tier

7 days Payment by 2nd tier

This example assumes that the work was performed or materials delivered 15 days prior to submission of the request for payment. Actually, the time will vary according to the contractual provisions between the parties and how fast the items are invoiced. The point of the example is that even with the prompt payment rules contained in the act, a first tier subcontractor or supplier will usually be in excess of thirty days between the time they performed the work or delivered the materials before they receive payment.

Let us use the following example, however, to explain how the process works where payment is not made according to the act's timetable. Assume that Y is a supplier to a second tier subcontractor. Let us further assume that the owner pays at 30 days after receipt of a request for payment, the prime contractor pays 10 days thereafter, the first tier subcontractor pays at seven days and the second tier subcontractor pays at 13 days. Let us also assume that Y has a credit agreement with the second tier subcontractor calling for payment within 30 days from delivery and interest on all overdue accounts at 18 percent per annum. With the exception of the project owner, the act creates an interest penalty only when a contractor or subcontractor does not pay within a set time frame from receipt of payment. Thus, even though the project owner paid nine days late, Y is not entitled to any portion of the interest penalty therefrom. The prime contractor may opt to pursue the owner for the interest penalty, or not, at its d iscretion. The same rule will apply to the payment from the prime contractor to the first tier subcontractor. However, Y is entitled by the act to an interest penalty against its debtor--the second tier subcontractor--because payment was not made until 13 days after receipt of payment. This interest penalty should be in addition to the interest accrued under the credit agreement. If Y delivered $5,000.00 worth of material on the first date on the timeline, then payment would have been due according to the credit agreement prior to the project owner ever making payment to the prime contractor. Under our example, Y did not receive payment until 75 days after the materials were delivered. For the first 62 days of the delayed payment, Y is entitled to interest at its agreed rate. For the last thirteen days, however, it actually is entitled to interest at 3 percent per month because it may recover interest under the credit agreement at one and one-half percent per month and an additional one and one-half percent p ursuant to the act.

While the wording of the act is not clear as to how the interest penalty is calculated, it is our belief that the proper reading of "per month or fraction thereof" means that the one and one-half percent interest is calculated and due on the day after payment should have been made. Thus, if payment is delayed eight days, the full one and one-half percent interest is due just as if payment were delayed thirty-seven days.

One new wrinkle that was instituted with the act is that progress payments are no longer subject to garnishment, attachment, execution or levy. There has been at least one instance where the courts in New Mexico have allowed a judgment creditor to attach the full amount of a progress payment despite the fact that a portion of the progress payment was intended to pay lower tier subcontractors and suppliers. Under the act, the only monies that should be subject to garnishment, attachment or execution are those funds that are actually due to the contractor, subcontractor or supplier after paying all of the debtor's lower tier subcontractors and suppliers.

Exceptions to Prompt Payment Provisions

As with the retention provisions, there is an exception to the prompt payment provisions of the act. Local public bodies, i.e., cities and counties, may specify alternate payment provisions up to, but not to exceed 45 days after receipt of an undisputed request for payment when grant money is a source of project funding. In order for a local public body to take advantage of this exception, it must meet three requirements. First, at least some portion of the financing for the project must be in the form of federal or state grant funds. This exception was introduced to avoid requiring a city or county entity to pay the interest because the granting penalty authority was slow in making payment. The second require ment is that the construction contract between the local public body and the prime contractor specifically provides in a clear and conspicuous manner the time given for the local public body to process the request for payment. The final requirement is that every page of the plans contain the following o r substantially similar legend:

Notice of Extended Payment Provision

This contract allows the owner to make payment within___days after submission of an undisputed request for payment. If the local public body cannot comply with all three requirements then the standard payment provisions set forth in the act will apply.

Sean R. Calvert, Esq. is with the law firm of Calvert Menicucci, P.C., in Albuquerque, NM.
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Title Annotation:construction project fund handling
Author:Calvert, Sean R.
Publication:Business Credit
Geographic Code:1USA
Date:Sep 1, 2001
Words:2194
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