In Minn., public-sector subcontractors back timely-payment bill (UPDATE)

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By BRIAN JOHNSON
BridgeTower Media Newswires

MINNEAPOLIS, MN — Donna Gulden isn’t chasing work on public projects in Minnesota anymore. The reason?

She’s tired of waiting for that check in the mail to be paid in full. In one case, Gulden said, it took five years to be fully paid for a public project completed by her business, Homeco Insulation. She declined to go into detail about the project or the client for fear of retribution.

“I want to do this work. I am not trying to limit what we can do,” said Gulden, president of Homeco Insulation. “But when I have to wait five years … I am not going to bid it anymore.”

Such concerns aren’t nearly as pressing in Wisconsin, though, thanks to a law that former Gov. Jim Doyle signed in 2003 to not only cap retainage on public projects in Wisconsin at 5 percent but also have retainage requirements cease applying once public projects have reached the halfway point. The law both reduced the maximum amount that could be withheld from contractors and allowed government agencies and contractors to agree to eliminate retainage requirements entirely on particular projects.

Jeff Beiriger, who is president of Wisconsin’s Association of Management Services and serves in leadership roles in other construction industry groups, such as the Wisconsin Roofing Contractors Association, said subcontractors in Wisconsin have rarely complained in recent years of having trouble with timely payments on public projects.

Beiriger said public and private project owners both have an incentive to pay subcontractors for the work they’ve done on a project. Owners know that subs which aren’t paid promptly will become distrustful and reluctant to bid on future projects, he said.

With many construction projects underway in Wisconsin, reputable subcontractors can now afford to pass up projects if they have any reason to suspect they might not be paid promptly.

“Is the short term gain worth the long term potential for not having a solid group of subcontractors who want to perform on your project?” Beiriger said.

“With fewer contractors chasing more work they could be a little more selective,” he added.

But in Minnesota, Gulden isn’t alone in waiting to get paid, according to the Minnesota Subcontractors Association. The subcontractors association says subcontractors sometimes have to wait months or even years to be paid in full for work on public contracts. That’s a big source of anxiety for subs, many of which are small or disadvantaged businesses.

At issue is a Minnesota law that allows owners to delay paying 5 percent of what they contractually owe to subcontractors. The idea is to give subcontractors an incentive to make sure the projects are completed properly. But the law doesn’t specify when that final payment, known as “retainage,” has to be paid.

The Minnesota Subcontractors Association and other industry groups are backing a bill that would require owners to pay subcontractors and general contractors within 30 days after their work is successfully completed. The bill is expected to be introduced later this week.

In addition, the bill requires any retainage to be held in a trust account, and it specifies that any disputes with regard to retainage payments must be documented and shared with other parties, according to the Minneapolis Subcontractors Association.

“The legislation is about basic fairness and paying people in a reasonable time for the work they successfully performed,” said Nick McNeely, a lobbyist for the subcontractors association.

A survey conducted in fall 2017 of members of the Minnesota Subcontractors Association showed that subcontractors waited more than 290 days on average to be fully compensated for work completed for owners ranging from cities and school districts to the state of Minnesota.

“This creates a significant cash-flow problem for all subcontracting businesses in Minnesota and is particularly difficult on small and emerging businesses,” said David Bruneau, executive director of the subcontractors association.

The Minnesota Subcontractors Association’s survey reviewed billing dates, payment dates and retainage amounts for more than 90 public projects. The combined value of the work performed was $23.4 million, including $1.35 million worth of retainage.

In one case, a subcontractor had to wait 650 days to be paid in full on a Metropolitan Airports Commission project, according to the survey. The total invoice was $208,000 and the amount retained was $10,400, the survey said.

Richard Biddle, contracts and grants manager for the Metropolitan Airports Commission, said that existing contract documents used by the airports commission and other public entities already include “prompt payment” provisions. He said he’s not aware of anyone’s having to wait months or years for payment on a Metropolitan Airports Commission project.

“I don’t have anything in my box that even approaches that time frame, and we monitor those regularly,” said Biddle, who added that the airport commission works with project managers and design teams to figure out what’s holding things up in the event of a late payment.

The League of Minnesota Cities wants to stay engaged with interested parties on the retainage issue and “looks forward to being contacted by the proponents of the bill this year,” said Irene Kao, lobbyist for the league.

In a statement, the Minnesota Department of Administration said payment for services and goods are “a key part of a responsible public procurement program as well as being essential to our efforts in encouraging greater supplier diversity and small business participation.”

“The Department of Administration pays 98 percent of invoices for products and completed services within 30 days,” the department said. “Equally as important is the department’s obligation to protect taxpayer investments by ensuring that projects are done correctly and completely. Retainage is an essential tool needed to meet that obligation.”

Tim Worke, chief executive of the Associated General Contractors of Minnesota, said retainage is a complex issue that affects everyone in the construction chain, from owners to ancillary partners.

Worke referred to a bill approved in 2016 that caps retainage at 5 percent.

“We feel that good progress was made on this just two years ago,” said Worke.

Even so, at least some subcontractors say more is needed.

Anecdotal information from subcontractors suggests that the payment issue ties in with another industry concern: a lack of bidding on public-sector projects.

At the 2019 Minnesota Construction Summit in Minneapolis, representatives of the Department of Administration, the Minnesota State Colleges and Universities system, and others said they have struggled to attract bidders for their projects.

Among the headwinds cited by speakers: a persistent shortage of skilled construction workers, competition from private projects, and the burdensome paperwork that often comes with public work.

But for at least some subcontractors, the waiting is the hardest part.

Gulden, whose family-owned company was founded in 1986, said retainage is an issue that stunts the growth of small companies and affects their ability to invest in equipment and hire new workers.

She said retainage questions are especially difficult for emerging businesses — the very same businesses that state, local and regional entities are trying to recruit to meet the diversity goals that apply to their projects.

Owners, prime contractors and subcontractors need to work together to ensure that everyone on a project is paid within a reasonable time, Gulden said.

“Five years is not reasonable,” she added.