The Michigan prompt pay and retainage laws apply to almost every type of public works projects within the state. Maintaining cash flow on a project is vital to a contractor’s success. These two sets of regulations are meant to provide protection to both ends of the spectrum. Prompt pay laws ensure timely payment to project participants on the lower tiers of the payment chain. While retainage helps protect owners and general contractors against contractor default or defective work. Let’s take a look at all of the regulations governing payment on Michigan public construction projects.
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Michigan prompt payment & retainage overview
Michigan has a set of construction prompt payment laws and retainage rules are codified in Mich Comp. Laws. §§125.1561 et seq. These statutes are fairly lenient compared to most prompt payment requirements in other states and only apply to certain types of public works projects. As for retainage, the amount allowable is on the higher end (compared to other states), but the regulations do provide for the reduction and payment of retainage at certain points throughout the project.
Michigan prompt pay laws
Michigan’s prompt pay laws only apply to projects financed by a public agency. This includes any state, county, city, township, village, assessment district or any other authority created by law. However, there are certain types of public projects that aren’t covered under these laws.
The only types of public works project not protected by these provisions are projects contracted by state transportation, school districts, junior or community colleges, state housing development authorities, and a municipal electric utility or agency.
In addition to these restrictions, in order for the prompt payment requirements to apply, there are financial requirements as well. These regulations only apply to contracts that are at least $30,000 or provide for more than 3 payments; any construction contracts that provide for less will not be subject to these regulations.
Timeframe for payment
Once a contractor or sub has performed according to their contract terms. Public construction projects are required to not only designate who payment requests are to be made; but also the time and manner that such requests should be made.
Payments from the public entity to the prime contractors
Payments from the public entity to the prime contractor are due on the later of two events. Either (1) 30 days after the architect or professional engineer has certified to the public agency that the work was performed in accordance with the contract terms; or (2) 14 days after the public agency received funds from the department or agency that is funding the project. If the public agency fails to make a payment on time, the person requesting payment may include the reasonable interest on the past due amounts on the next request for payment.
Payments from the prime contractor to sub
As for all other payments down the chain, there are no specific provisions governing the time for payment. Accordingly, the deadline for payment is governed by the terms of the contract itself.
Interest & attorney fees
As we stated above, the Michigan prompt payment act is rather lenient when compared to other state approaches. Another example of this lenient approach is the fact that there is no real cap on the amount of interest that will accrue on late payments.
The statute only states that there may be a reasonable amount of interest allowed to accrue and be charged in the preceding progress payment application. Generally speaking, the average interest rate to accrue on late payments is somewhere between 1-2% a month. Not only are the prompt pay provisions silent on the amount of interest that will accrue there is also nothing on whether attorney’s fees can be awarded.
These statutes also provide the rules and guidelines for withholding retainage on public projects as well. The amount of retainage allowable on Michigan public works contracts is limited to no more than 10%. Once the contractor has reached 50% completion of the contract work, the entity may decide to cease withholding retainage if the performance is acceptable. If, however, the work is not deemed to be unsatisfactory, then retainage can continue to be withheld for the remainder of the project.
Any retainage withheld on the project must be deposited in an interest-bearing account for the benefit of the contractor. Once retainage is released, the interest accrued must be paid as well. If, at any point of time past 94% completion of the contract, a contractor may request the release of all retained payments and interest. But they may only do so if they provide a bank-issued letter of credit for the amount of retainage and interest.
Dispute resolution procedure
In addition to the requirements for a construction contract set forth above, another clause must be contained within the Michigan public works contract as well. This clause is meant to bind parties to submit certain matters to a dispute resolution procedure. The dispute resolution agent will be designated by the agreement of both parties.
That agent will oversee disputes in regard to any delays or acceptance of work that would affect any of these payment regulations. The decision made by the agent will be final and binding against all parties. If it’s determined that the delay in completion was caused by the contractor, the interest accrued on the retainage withheld becomes the property of the public agency.
As you can see, the Michigan prompt pay provisions and retainage laws are very narrowly tailored. They only apply to certain public projects, and only explicitly regulate payments from the public entity to the prime contractor. Additionally, where these are regulated, the parties are left relatively free to agree to their own contractual terms and interest rates. Given that, the importance of reading your construction contract documents carefully cannot be overstressed. These regulations are meant to ensure you get paid what you’ve earned, avoid any provisions that may affect your rights under these laws.