State Laws Show Public Policy Advances for Subcontractors

Matthew Cass

August 2007

As the 2007 legislative session draws to a close for the vast majority of states, construction subcontractors in key states have much cause to celebrate following the enactment of several laws promising to improve the business environment in the construction industry.

Empowered by local chapters of the American Subcontractors Association, specialty trade contractors in Colorado, Connecticut, Georgia, Kansas, New Mexico, Tennessee, and Texas secured precedent-setting public policy reforms in valuable areas such as indemnity, contingent payment and retainage. Kentucky legislators also enacted important reforms.

"These legislative victories represent advances for our entire industry, not just those subcontractors directly affected,” said 2007-08 ASA President David H. Bradbury, Precision Concrete Construction Inc., Alpharetta, Ga. "The enactment of good, subcontractor-friendly laws enables progress on other issues in these eight states while also facilitating opportunities for other legislative improvements to be made across the country. ASA urges all subcontractors to use these ASA chapters’ victories as catalysts in their own quests for a better policy environment.”

Colorado. ASA of Colorado witnessed several years of persistent advocacy eventually pay off April 11, when Gov. Bill Ritter (D) signed a sweeping indemnity reform bill into law that prevents the contractual transfer of liability in construction contracts and closes the additional insured loophole.

Effective July 1, 2007, the law marks a dramatic change for Colorado, which in ASA’s annually published "The ASA Report: The Policy Environment in the States,” released in March 2007, received zero out a possible 100 points for the quality of its anti-indemnity law. It ranked in the bottom 15 states in the country in that category. In the next report, Colorado almost certainly will rank in the top 10 states.

Spearheaded by ASAC for the past four years, and consecutively vetoed in both 2005 and 2006 by former Gov. Bill Owens (R), the law prevents any party in a construction agreement from contractually indemnifying another for damage or injury caused by its own negligence. According to the legislation (S.B. 87), "[a]ny provision in a construction agreement that requires a person to indemnify, insure or defend in litigation another person against liability for damage arising out of death or bodily injury to persons or damage to property caused by the negligence or fault of the indemnitee or any third party under the control or supervision of the indemnitee is void as against public policy and unenforceable.”

ASAC Lobbyist Corky Kyle, CAE, The Kyle Group, Arvada, Colo., who worked on the campaign to enact S.B. 87, will be one of main presenters at the inaugural ASA Champions Academy 2007, set for Oct. 6-9 in the nation’s capital.

Kansas. Thanks to the efforts of ASA-Greater Kansas City, subcontractors in Kansas are now assured of payment on all projects following the enactment of the Fairness in Public Construction Contract Act (S.B. 333). Signed by Kansas Gov. Kathleen Sebelius (D) on April 21, the new comprehensive prompt payment law requires public owners to pay contractors undisputed amounts due within 30 days of receiving a proper invoice and contractors to pay subcontractors within seven days of receiving payment from owners. The seven-day requirement applies to all lower tiers of construction. Late payments will be subject to interest at a rate of 18 percent per annum and retainage will be capped at 10 percent.

The new law represents a major victory for ASA-GKC. Supported by a Subcontractor Advocacy Grant from ASA, the Kansas City, Mo.–based chapter campaigned for S.B. 333 as it made its way through both houses of the legislature. The chapter helped secure the enactment of similar legislation for private work two years before.

"Fairness is our goal — and was from the start,” said ASA-GKC Secretary/Treasurer Ken Keller, Western Extralite Co., Kansas City, Mo. The new law addresses other critical issues, such as prohibiting contractual bond waivers; permitting suspension of work for nonpayment, with proper notice; requiring disputes to be settled in the county where a project is located; and voiding "no damage for delay” clauses. As a result of the new law, Kansas will see changes in several categories scored in "The ASA Report.” Texas. June 16 marked a momentous occasion in Texas construction history as Gov. Rick Perry (R) signed into law a landmark anti-contingent payment bill (S.B. 324). The signing also represented a major victory for ASA of Texas and ASA’s five Texas chapters whose members invested numerous hours lobbying, meeting and educating state representatives on the need for such legislation.

Effective Sept. 1, 2007, the new law will make contingent payment clauses in construction contracts unenforceable unless nonpayment is the result of failure to meet contractual obligations by the party seeking payment.

"Time and time again, Texas subcontractors have seen payment slip through their fingers due to no fault of their own,” said ASA-Houston Chapter President Craig Kramer, Astro Fence Company, Houston, Texas.

"Thanks to the hard work of ASA members and their allies, that era will soon come to a close.”

In addition, the measure will specifically limit sureties’ enforcement of contingent payment clauses and will make such clauses unenforceable for work/materials delivered 45 days after notice is received for nonpayment of an undisputed invoice. "Unconscionable” contingent payment clauses will be unenforceable if the party to which payment was due is able to prove that the owing party did not perform due diligence and offer "reasonable cooperation” in collecting amounts due. The new law does not apply to design services, civil engineering construction and small residential construction projects.

New Mexico. ASA of New Mexico celebrated two separate legislative advances for subcontractors on April 6, as New Mexico Gov. Bill Richardson (D) signed two new laws supported by the chapter. Already the leader in subcontractor-friendly public policies among all the states, as documented in "The ASA Report: The Policy Environment in the States,” New Mexico is poised to widen its lead.

One of the laws prohibits the use of retainage on both private and public construction, other than for residential construction projects containing four or fewer dwellings, and state Department of Transportation projects. Effective June 15, 2007, the legislation (S.B. 604) sets a 21-day prompt pay deadline for a construction owner to pay its contractor after receiving an undisputed invoice and allows for 1.5 percent interest per AUGUST on late payments. Local public agencies receiving grants for construction are allowed up to 45 days to render payment. Payments to subcontractors and suppliers on all tiers of construction are required to be made within seven days of receipt of payment from the owner, contractor or subcontractor.

The other law corrects the effect of a 2006 federal court decision by specifying that a pay-if-paid clause does not constitute a waiver of mechanic’s lien rights. Effective June 15, 2007, the legislation (S.B. 574) prohibits a construction owner or original contractor from providing a single security for the cancellation of the lien of more than one claimant, allows arbitration to be used to enforce liens, and provides for reasonable attorney fees for the prevailing party in a dispute.

Tennessee. Thanks to the leadership of ASA of Tennessee, subcontractors in the Volunteer State will benefit from millions of dollars in project earnings made available through a law (Public Chapter 201) enacted in May 2007. Signed May 22 by Gov. Phil Bredesen (D), the measure (H.B. 1003) limits retainage on all public and private construction projects in the state to 5 percent, while requiring that retained funds be kept in interest-bearing escrow accounts. It also requires release of retainage by construction owners, contractors and subcontractors within specific time frames.

Effective July 1, 2007, the law also addresses late payment of retainage, which causes cash flow problems. It requires a construction owner to release all retainage to a prime contractor within 90 days after completion of work or substantial completion of a project, whichever occurs first. The law requires prime contractors to pay retainage to subcontractors, and subcontractors to pay sub-subcontractors and suppliers, within 10 days of receipt of retainage held for the work/supplies they provide.

Georgia. Aiming to clarify risk transfer in construction contracts, Georgia Governor Sonny Perdue (R) signed legislation (H.B. 136) that expands the state’s restriction against broad form indemnification to include additional insured requirements—and effectively closes a loophole created by court interpretations of Georgia’s indemnity statute.

Previously, the state’s anti broad form indemnity statute appeared to void indemnification agreements that required one party to indemnify and hold harmless the other for claims arising out of the indemnitee’s sole negligence. However, Georgia appellate courts created an exception that when a broad form indemnity clause—which by itself would be void and unenforceable under the statute—is coupled with a corresponding contractual obligation for the indemnitor to provide insurance coverage, the statute does not apply and the clause is fully enforceable. The courts said this loophole extends even when a claim arises out of the indemnitee’s sole negligence.

Signed May 18, the main purpose of this new law, according to David Hendrick, Esq., Hendrick, Phillips, Salz-man & Flatt, Atlanta, Ga., is to close this loophole and enforce "the public policy irrespective of insurance coverages and contractual requirements so that if the indemnity clause is ‘broad form’ it is void and unenforceable—insurance aside.”

Connecticut. In Connecticut, a new law that amends the state’s mechanic’s lien statute will seek to help those lien bond claimants who are victorious in their litigation. Under the terms of the new measure (H.B. 7236), courts will be required to award costs and attorney fees when a plaintiff prevails in any action upon a bond that has been substituted for a mechanic’s lien. Signed June 11 by Gov. M. Jodi Rell (R), the new law takes effect Oct. 1, 2007.

Kentucky. Subcontractors in Kentucky are benefiting from a comprehensive reform law that prohibits "no damage for delay” clauses, establishes prompt pay requirements, and regulates retainage. Signed April 5 by Gov. Ernie Fletcher (R), the Fairness in Construction Act of 2007 (H.B. 490) also makes void and unenforceable any contract language that disallows certain remedies for dispute resolution or waives mechanic’s lien rights.

With respect to Kentucky’s mechanic’s lien statute, H.B. 490 amends the existing law by extending the time a contractor has to file a lien. Unpaid subcontractors and suppliers on public projects have 60 days from last furnishing labor or materials or the date of substantial completion, whichever is later, to file a lien. The new law also specifies that owners must pay undisputed amounts to contractors within 30 business days after receiving a payment application, and that contractors must pay subcontractors within 15 business days after receipt of payment from the owner. Past-due payments bear interest at 12 percent per year.

Effective July 1, 2007, the new law applies to construction contracts in both the public and private sectors, but excludes residential construction.

The changes in public policy secured by subcontractors in the 2007 legislative session will be reflected in the scores reported in the next edition of "The ASA Report: The Policy Environment in the States.” In the report, ASA scores: (1) prompt payment protections; (2) treatment of pay-if-paid clauses; (3) mechanic’s lien protections; (4) payment bond protections; (5) retainage limitations; (6) anti-indemnity protections, including limits on "additional insured” endorsements; and (7) anti-"bid shopping” measures.

About the Author
Matthew Cass is communications manager for the American Subcontractors Association, Alexandria, Va.

For More Information
To access a copy of the 2006 report, visit the ASA Web site, www.asaonline.com.