Stites & Harbison, PLLC

New legislation in Kentucky, the Fairness in Construction Act of 2007, makes certain construction contract provisions unenforceable, establishes prompt pay requirements and limits retainage.  The Act, which becomes effective on July 1, 2007, will apply to construction contracts in both the public and private sectors (residential construction is excluded).

The new law benefits contractors and subcontractors because it prohibits no damage for delay clauses and advance waiver of mechanics' lien rights.  Such clauses are now considered contrary to public policy, void and unenforceable.  Clauses allowing liquidated damages and permitting limitations on delay damages are permissible.

The Act includes prompt pay provisions applicable to owners, contractors and subcontractors.  Owners must pay undisputed amounts to contractors within 30 business days after receipt of payment application.  Contractors must pay subcontractors within 15 business days after receipt of payment from the owner.  Past due payments bear interest at 12% per annum.

The Act limits accrual of retainage.  Ten percent is permissible until 50% of the project is completed; retainage thereafter is limited to 5%.  When a project achieves substantial completion, retainage shall be released except for a sum equal to 200% of the owner’s reasonably estimated cost of uncompleted work and subject to an agreed schedule for completing the work.  Contractors must likewise release subcontractor retainage within 15 days after the owner pays retainage.  The statute defines "substantial completion" as "the point at which, as certified by the contracting entity, a project is at the level of completion, in strict compliance with the contract, where:

(a)    necessary approval of public regulatory authorities has been given;
(b)    the owner has received all required warranties and documentation; and
(c)    the owner may enjoy beneficial use or occupancy and may use, operate and maintain the project in all respects for its intended purpose."

The Act modifies Kentucky's mechanics' lien statute.  A contractor who obtains a judgment against a private landowner may file a mechanics' lien within 60 days after a judgment.  (The Act is not clear about what happens if the judgment is not final and unappealable.)  Unpaid subcontractors and suppliers on public projects will now have 60 days from last furnishing labor or materials or the date of substantial completion, whichever is later, to file a lien against the prime contractor’s project proceeds.

The legislation affirms the contractor's rights under the Kentucky Model Procurement Code to assert claims against the Kentucky Transportation Cabinet in court instead of through an administrative hearing.  The Cabinet in recent years has tried to avoid court proceedings by promulgating dispute resolution regulations requiring an administrative hearing with limited judicial review.  Section 2(2)(a) of the Act makes contract provisions extinguishing the right to resolve disputes through litigation in court unenforceable.

The legislation was backed by several construction industry groups, drew support across party lines and passed by wide margins in both houses of the General Assembly.  Some opponents criticized the Act's application to private sector contracts and pointed to perceived ambiguities in portions of the text.  While there is room for legitimate differences of opinion, there can be no doubt that construction contracting in Kentucky has significantly changed.

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