Parties to public and private construction contracts entered into after August 1, 2019 are subject to new statutory requirements and limitations regarding the withholding and release of retainage, that portion of earned contract funds withheld by the owner from the contractor pending completion of the project. It is important that owners, prime contractors, and subcontractors understand their new rights and obligations under the new law.
Certain changes to the retainage laws are applicable to public projects:
- The Public Owner must release all retainage within 60 days of substantial completion.
- The Prime Contractor must release to its Subcontractors all remaining retainage as the Prime Contractor receives retainage from the Public Owner. Once it has received retainage from the Public Owner, the Prime Contractor must pay retainage on undisputed work to its Subcontractors within 10 days. It need not pay retainage on disputed work, but it must pay the undisputed portion and provide its Subcontractor with a written statement detailing the dispute.
- The definition of “substantial completion” is still essentially the same – when the work can be occupied and used for its intended purpose, but a provision was added for highway, street and bridge work to define substantial completion when the construction traffic control and inspections are no longer needed.
- If punchlist work remains after substantial completion, the Public Owner may continue to withhold up to 250% of the value of the punchlist work. The Public Owner must provide the Prime Contractor with a written statement of the amount and reason for the withholding, and the Prime Contractor must provide a copy to any affected Subcontractor that requests it.
- The Public Owner may withhold the lesser of 1% of the contract, or $500, until the final project paperwork (e.g., OEM manuals, prevailing wage documentation, etc.) is provided.
- Withholding for warranty work is not permitted, but neither is any warranty claim waived.
Of course, the new law does not require payment for work yet to be completed or for which no invoice has been submitted. Also, the Public Owner need not pay for those portions of the work funded with federal or state aid until those funds are received.
The law regarding retainage on private projects was also changed to bring it in line with the requirements and limitations for public projects. Unless unique to public projects and public work, the new requirements set forth above will apply to Private Owners, Prime Contractors, and Subcontractors.
Although the new laws will mean that Prime Contractors and their Subcontractors may not have to wait for their retainage, there is an increased risk of the premature and improvident release of retainage that is being held to ensure compliance and completion. This has the possibility of increasing risks for Owners, Lenders and Sureties.