(1) If the local government, prior to receipt of the total disbursement for a loan, a grant, of front-end planning funds or a grant of front-end implementation funds, fails to comply with the act, rules, or any other law of the state applicable to the development project, the department may, after giving reasonable notice to the local government and contractor, withhold all or any portion of further disbursements to the local government pending compliance. However, payments to the contractor shall be authorized for all work approved by the local government and performed by the contractor prior to the date of such notice.