The tide is turning on retainage

For decades contractors and subcontractors have borne the brunt of having money that they have earned held back from them to provide the owner with the funds necessary to complete their work in the event that the contractor fails to do so. The amount of retention can range anywhere from 5% to 15% (or more), although its sometimes reduced as the job progresses. It is generally not released until the

For decades contractors and subcontractors have borne the brunt of having money that they have earned held back from them to provide the owner with the funds necessary to complete their work in the event that the contractor fails to do so. The amount of retention can range anywhere from 5% to 15% (or more), although it’s sometimes reduced as the job progresses. It is generally not released until the entire project is “substantially complete” – although I have seen contracts drafted that allow the owner to hold the retainage until the repair callback period has expired.

Contractors and their subs, especially their subs, have complained about the unfairness of this practice. Not only is the amount of money being held thought to be excessive, but the length of time it is held seems to stretch way beyond what is really necessary. This falls particularly hard on the early finishing subs.

Frequently, if any disputes have arisen between the owner and the contractor, the retainage is used as leverage by the owner to induce a settlement. Due to the use of “pay when paid” clauses in subcontracts, the owner’s withholding ends up hurting many subs.

Even where an owner does not hold retainage, it is not uncommon to find general contractors insisting that it be held back from their subs to give the subs extra incentive to finish their work.

Few contractors have the clout to force a change to this practice, so it has been up to the legislatures to do so. At the forefront is the U.S. government, which modified the Prompt Payment Act, 31 U.S.C. §§ 3901 et seq. to specifically deal with retainage. Among its many provisions, the Prompt Payment Act:

• Restricts the government to holding no more than 5% retainage, unless the agency can justify a higher rate;

• Requires that interest be paid on funds that are not paid on time;

• Requires general contractors to pay subcontractors (progress payments as well as release of retainage) within seven days of receipt of funds from the government;

• Allows a party not paid on time to get its attorney’s fees if it has to sue.

Many states have passed similar laws for public contracts. The state of Oklahoma was one of the first to allow contractors to avoid retainage altogether if they would post security (such as certificates of deposit or a letter of credit).

Now we are starting to see legislatures address the issue in the context of private contracts.

Currently, 14 states have retainage laws that either apply specifically to private contracts or apply to both public and private contracts. These states include Arizona, California, Connecticut, Idaho, Maine, Minnesota, Montana, New Mexico, North Carolina, North Dakota, Tennessee, Texas, Utah and Vermont. Richard A. Stochenberg & John M. Limbaugh, Fifty-State Review of Retainage Laws, 22-SPG Construction Law. 24, 24-29 (2002).

Although all the states’ statutes specifically address how retainage can be handled during a private construction project, they vary widely in their application.

For example, California’s private project retainage statute:

• Requires retainage be released within 45 days after the “date of completion”;

• Obligates the general contractor to pay each sub within 10 days from the time that all or any portion of the retention was paid by the owner;

• Limits the amount held after the date of completion to 150% of the estimated value of the disputed amount; and

• Subjects the owner or general contractor to a charge of 2% per month, attorney’s fees and costs for wrongfully withheld retainage. Cal. Obligations Code § 3260 (West 2002).

It now seems like these types of statutes are gaining popularity. For example, the state of Missouri has just passed a retainage statute on private contracts that is arguably the most comprehensive of its kind. The statute limits retainage on private projects to no more than 10% (unless special circumstances are present); requires the owner to hold the retainage in trust for the benefit of the contractor and subs; bars the general contractor from holding more retainage from subs than the owner holds from the general; requires the release of retainage within 30 days of substantial completion; requires that an owner or general contractor release retainage within five days of receipt of “acceptable substitute security”; requires the release of retainage to early finishing subs; limits funds held after substantial completion to just 150% of the value of incomplete work; requires that subs be paid within seven days of payment to the general contractor; and allows the court to award 1.5% interest per month, plus attorney’s fees if retainage is held improperly.

Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo., 816/421-4800, e-mail to [email protected]