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How will your construction contract hold up under the new requirements of the Kentucky Fairness in Construction Act?

In the recent legislative session of the Kentucky General Assembly, the Legislature passed the “Kentucky Fairness in Construction Act” which imposes significant changes to the current parameters of construction contract negotiating. The new law establishes certain provisions as null, void and unenforceable under Kentucky construction contract law; establishes time limits for payments from owners to contractors, contractors to subcontractors, and subcontractors to its subcontractors; permits a contractor to recover costs resulting from a delay if the delay was caused by the contracting party; caps retainage at ten percent (10%) until half of the work is completed and five percent (5%) thereafter; requires the release of retainage within thirty (30) days of substantial completion of the project; and provides that costs and attorney’s fees may be awarded to the prevailing party in a dispute. The provisions of the Kentucky Fairness in Construction Act apply to both private and public construction projects (but not to residential construction projects) and only apply prospectively to all contracts entered into after the effective date of the Act, July 1, 2007.

Provisions Now Void and Unenforceable Under Kentucky Construction Contract Law

The Kentucky Fairness in Construction Act designates certain specific contract provisions as void and unenforceable. The specific provisions include any provision that attempts to waive, release or extinguish the right of any party to resolve any dispute arising from the construction contract through litigation, but does allow binding arbitration as a substitute for litigation. Also, the Act prohibits any provision which provides for an advance waiver, release or extinguishment of the mechanic’s lien rights of a contractor or subcontractor provided under KRS 376. Provisions which require partial lien releases in exchange for progress payments are not void.

The Act also makes void and unenforceable any so-called “No Damages for Delay” clause. These are contract provisions which attempt to waive, release or extinguish the right of a contractor or subcontractor to recover costs, additional time, damages or to receive an equitable adjustment in its contract for delays which are in the control of the owner or Public Authority. Provisions which permit a contractor or subcontractor to recover delay costs, which require that notice of the delay be communicated to the property owner, which provide for reasonable liquidated damages, or which specify which delay costs that are recoverable by a contractor or subcontractor are fully enforceable.

Any provision found to be null, void or unenforceable will be severed from the contract and will not affect other provisions of the contract which comply with Kentucky law.

Required Timetable for Payments

The Kentucky Fairness in Construction Act also establishes a specific timetable which directs when payments from owner to contractor, contractor to subcontractor and subcontractor to subcontractor must be paid.

With the exception of contracts with a postsecondary institution or a board of education, the Act requires that “all contracts for construction shall provide that payment” of undisputed amounts due from an owner or Public Authority be made to a contractor within thirty (30) business days of when the owner or Public Authority receives a timely, properly completed and undisputed request for payment. A postsecondary institution or board of education must make such payments within forty-five (45) business days. If payment is not made, the owner or Public Authority owes interest to the contractor beginning on the thirty-first (31st) business day (or the forty-sixth (46th) business day for postsecondary institutions and boards of education ) at an annual rate of twelve percent (12%).

On the twenty-fifth (25th) business day after it submits a request for payment, a contractor must notify the owner or Public Authority that payment has not been received by the contractor and must include the date on which interest will begin to accrue.

A contractor must make payment of all undisputed amounts to a subcontractor within fifteen (15) business days after receiving payment from the owner or Public Authority, if the subcontractor has provided a timely, properly completed and undisputed request for payment. If payment is not made, the contractor owes interest to the subcontractor beginning on the sixteenth (16th) business day at an annual rate of twelve percent (12%). This same schedule applies to payments from a subcontractor to another subcontractor.

Limitation on Retainage to be Held

The Act also limits the amount of retainage which can be held by the owner, a contractor or a subcontractor to ten percent (10%) of the amount of any undisputed payment until half (50%) of the construction project has been completed. Thereafter, retainage of no more than five percent (5%) of the total remaining contract amount can be withheld until the project is completed.

Thirty (30) days after a project has been substantially completed, the owner or Public Authority cannot hold more than 200% of the reasonably estimated cost of the work remaining on the project as reasonably estimated by the owner or Public Authority. A contractor will then have fifteen (15) business days after receipt of the retainage to pay its subcontractors their proportional share of the retainage. If retainage is not paid based on the above schedule or as required by the contract, the owner, Public Authority, contractor or subcontractor owes interest from the first business day after the retainage is due at a rate of twelve percent (12%).

The Act requires the owner and/or Public Authority to determine the reasonable cost remaining by agreeing on a schedule for completing the project with the contractor and any applicable subcontractors. The Act does not provide a protocol for situations where the parties cannot agree.

For the purposes of this subsection, the Legislature defines “substantial completion” as “the point at which, as certified in writing by the [owner or Public Authority], a project is at the level of completion, in strict compliance with the contract, where” (a) needed approval by any regulatory authority has been received; (b) the owner or Public Authority has received all required warranties and documentation; and (c) the owner or Public Authority “may enjoy beneficial use or occupancy and may use, operate and maintain the project in all respects, for its intended purpose.” The Act goes on to state, however, that partial use or occupancy by the owner or Public Authority does not necessarily mean that the project is substantially complete and shall not be evidence of substantial completion.

Allowance of Mechanics’ Lien Rights

A contractor of a private construction contract is granted certain mechanics’ lien rights under the Act. To obtain such rights, a contractor must file a lien, pursuant to the provisions of KRS 376 within sixty (60) days of entry of judgment against an owner. These new lien rights do not apply to public construction contracts which continue to follow the time provisions of KRS 376.250.

However, the Act does, in certain circumstances, extend the time for filing a lien statement on a public construction project. Specifically, the Act amends KRS 376.230 which currently requires a lien statement on a public construction project to be filed within sixty (60) days of the last day of the month in which services are provided. The Act changes the law to allow a lien statement to be filed on the latter of (a) sixty (60) days of the last day of the month in which services are provided or (b) by the date of substantial completion. This new substantial completion deadline does not apply to private lien rights.

Allowance of Attorney’s Fees and Costs for Any Violation of the Kentucky Fairness in Construction Act

The importance of adhering to the deadlines and provisions of the Kentucky Fairness in Construction Act is exemplified by the legislature’s inclusion of a mandatory award of costs and reasonable attorney’s fees to the prevailing party if it is determined that the losing party acted in bad faith. For public construction projects, the attorney’s fees recoverable are limited to the public contract rate for attorney’s fees.

The provisions of the Kentucky Fairness in Construction Act apply to all construction contracts entered into after July 1, 2007. Construction contract participants have until that time to ensure that their contracts comply with Kentucky law and to ensure that their calendar systems are sufficient to adhere to the new payment and retainage deadlines.

For more information on the Kentucky Fairness in Construction Act contact J. Mark Grundy at (502) 589-4200

  • Partner

    Mark is the Co-Chair of the Litigation Department, and he concentrates his practice in business litigation and dispute resolution. He has broad experience in contract, commercial, estate, real estate, trade secret, employee ...

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