Contract retainage is largely a matter of contract negotiation. There may be statutory or regulatory mandates on some public works contracts, but it is generally a matter to be determined by the parties themselves. Consequently, one sees a wide variety of arrangements. The retainage may be ten percent, or five percent, or some other percentage. The percentage may be reduced at certain milestones in the work. The retainage may be partially released upon substantial completion. It’s all up to the parties.
This flexibility was taken to an extreme in a recent Minnesota case. A municipality awarded a contract for street and utility improvements in a new residential subdivision. The improvements were to be funded by special assessments paid to the municipality by the developer. The developer was required to furnish collateral to secure the special assessment obligation.
The construction contract between the municipality and the contractor called for five percent retainage. After contract award the developer informed the municipality it was unable to furnish the required collateral. The project was in jeopardy.
In order to avoid losing the work, the contractor agreed with the municipality to increase the retainage to ten percent and have the retainage serve as collateral to secure the developer’s special assessment obligation. The developer defaulted on its obligation. The contractor, which had successfully completed the contract, forfeited its retainage.
Have you seen other situations where contract retainage has been used to secure an obligation separate from the contract itself? The contractor in Minnesota agreed to this arrangement. But it could be argued that the contractor was under economic duress or did not fully understand the use of its retainage. Isn’t this a misuse of contract retainage? I welcome your comments.
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- Price Adjustment Clause Discretionary in Construction Contracts
Bruce Jervis, Editor
Construction Claims Advisor