ConstructionPro Week, Volume: Construction Advisor Today - Issue: 33 - 12/11/2009

Should Subcontract Retainage Be Held Hostage In A Dispute?

When a subcontractor completes its work on a project, the prime contractor typically holds a significant portion of the subcontract amount. There is the accumulated retainage from each progress payment, as well as the unpaid requisition for the last performance period. At the same time, it is not unusual for subcontractor claims for additional compensation to remain unresolved. This raises some interesting questions.

 

The contractor will quite understandably be reluctant to release final payment with subcontractor claims still on the table. Yet there may be contractual and statutory  mandates to make final payment to the sub within a certain period of time. And failure to comply may subject the contractor to interest, penalties and attorney fees. A California contractor recently faced this dilemma – half a million dollars in extra work claims from the subcontractor and a state prompt payment statute requiring final payment to the sub within seven days of receipt of payment from the public project owner.

 

Fortunately for the contractor, the payment statute was interpreted to allow limited withholding pending resolution of the change order dispute. Otherwise, the contractor would have faced a penalty of two percent per month on wrongfully retained funds, plus the subcontractor’s attorney fees.

 

Obviously prime contractors have a legitimate need for protection. But can subcontract retainage be used by contractors to gain improper leverage -- to discourage the assertion of subcontractor claims and to coerce favorable settlement of claims that arise?

I'd like to hear your input regarding this situation.

 

Don't miss next week's issue of Construction Claims Advisor:

  • Shop Drawing Approvals and Interim Inspections Did Not Waive Specifications
  • Owner Bound by Association’s Selection of Arbitrator
  • Court Distinguishes Repair Work from Maintenance

 

Bruce Jervis, Editor
Construction Claims Advisor

 

Comments


I have been frustrated by the inability to rarely secure a retainer, thus taking on substantial weeks or months of work and expenses while waiting for payment - and now I'm having to deal with the aforementioned retainage policy wherein ten percent of my receivables are withheld with every invoice, and will not be collected - short of a collection lawsuit, until that building is occupied - sometimes a year or two after my work is done. That is just not ethical.

 

As an Architect with 30+ years of experiecne i find that any of these and other issues are already addressed in the AIA General Conditions and Supplementary Conditions. The problem is that to many architects and engineers do not read or understand what these documents say and what the A&E's rights and responsibilities are under them. These are part of the contract between the Owner and the contractor that the A/E is responsible to enforce. Failure to so is at least a breach of professional responsibility if not a breach of the contract. As a profession I am of the opinion that Architect and Engineers need to have more willingness to do their jobs, understand their jobs and role in the process and stand up for what is right. We are suppose to be the impartial party in this mix. If we can not do this we give up a large part of our traditional role as Licensed Professionals.

 

As an Agency Construction Manager who is frequently called upon to enforce the Retainage provisions of the contract, I want to mention that there are two issues here: a) the retainage withheld by the Owner, and b) that held by the contractor.

 

The solution lies in privity of contract rules. Having worked in California, as a contractor, their statutes unfairly favor the sub contractor and frequently involve the Owner where they have no business being involved as they have no privity of contract with the subs. It is incumbent upon the sub to negotiate a contract that recognizes the phase of construction when the sub finishes. If the sub can provide a lien release to the GC, and their work is complete then the GC should release their retainage, even if that means that the GC is still having theirs held by the owner. But if the sub has outstanding claims, and the GC has reason to be concerned that the sub has not finished the work, then they should be able to mitigate that risk by withholding.
One note, I have often had the argument by GC's that the owner should release the retainage and that the owner has the protection of the Performance bond to conver them. It is true that this protection exists, but the process of getting relief through the bond is time consuming, laborious and difficult. It should also be noted that rather than involving the owner in Sub/GC disputes, the sub should engage the protection afforded in the Payment bond, previous arguments notwithstanding.

Since most subcontracts contain some type of paid-when-paid clause, there IS a direct link between the owner & the subs. No GC is going to release retention to a sub if they haven't received that money by the owner. Liens against the Payment Bonds by subs are typically denied by the bonding company due to paid-when-paid clauses. The subs have no reliable or timely recourses in retention disputes unless they can sucessfully negotiate release up front. In my experience, GCs will not accept terms any different then what they have with the owner. I have retention from two years ago which is still "held" due to unrelated disputes between the owner & GC. Very unethical indeed.

 

This is really a GC-Sub issue. Typical General Conditions may have 10% retainage reduced to 5% at substantial completion for everything that is not in dispute or requiring correction/completion. With that, and if that is paid by the Owner, there would be money in the pipeline a bit earlier for the early subcontractors.
Some, not many, owners may want to get rid of old lien notices and will pay GC for retainage on early work when it has been deemed ok. Earthwork, after reviewing all compaction reports, for example. It is more hassle for the Owner; theoretically the sub would benefit and might bid lower as a result. 
In Washington state, for public works the GC can ask to have the retainage bonded. GC gets full payment earlier, and should pass it along. 
This is one area where the GC, who may do very little of the work if they function more as a manager/broker, has inordinate leverage against the subs.

 

Retainage is money held for completed work in place and according to any Performance Bond Co. belongs to the Sub. Money should be retained for incomplete work due to defects, substandard work, work not per the specs or drawings or delays attributed to the subcontractor. This should be explained in writing to the subcontractor and the owner prior to the money being retained. The General contractor should perform proper inspections to insure the work in place is proper and should problems occur with the sub-contractor they should be addressed immediately. This will help to avoid problems and disputes that lead to holding payments that should be paid.

 

For the GC, this is the cost of doing business and the reason for the big pay-off at the end... he has to take some risks and he has to finance most aspects of the project. If the GC does his job and submits partial releases of liens with each payment application, there should be no one standing with their hand open at the end of the project.

 

If the GC is not being paid for work submitted as outlined in the contract and geneeral conditions, then he needs to initiate his right to terminate the the agreement, suspend work until resolved or charge interest on outstanding amounts. NO change order work should commence until owner, arch. and contractor agree in writing to the scope and sum.
If the GC proceeds otherwise, he does so at this own risk and should not be at the peril of his subs.

What sort of ivory tower are you all living in? Do any of you have any real world experience? Have you ever read the subcontract agreements you sign with your General? Instead of getting on your high horse about what you think should happen, read your agreements and if you don't like the terms of the agreement then DON'T SIGN the agreement. Every subcontract we write reflects the agreement we have with the owner. Most of those agreements state that the subcontractor will be paid within 10 days of our payment, and the terms of our contract with the owner are available to each subcontractor. Over the past 10 years not one subcontractor has asked me for documentation regarding the payment terms of my contract with an owner prior to signing their subcontract agreement. If you read your subcontract agreement instead of just signing it and sending it back, you might know what you are signing up for.

 

It seems to me that your lead article is perpetuating the attitude in this industry that it is the general against the subcontractors. Your inflammatory verbiage is exactly what my junior high aged children experience in school.

Thank you to the A&E's that are defining and clarifying but I think they are missing the point as well. Know what the rules are before you start playing the game. And make sure you trust the guy you are considering working for. Then make sure you trust the guy he is working for. It may be a novel idea, but a team approach is the best way to provide outstanding solutions for yourself and the client.

If you submit proposals and sign contracts without reading them, shame on you. If you submit a proposal to a contractor you don't trust, or one you know is keeping money longer than they should, using your receivable as his bank even after he has been paid, then shame on you for helping that contractor be successful. Stop bidding to those guys. As my father always told me, "If you roll around with snakes, you're gonna get bit."

And by the way, "Big Payday," give me a break!

@ Jeff B, none of what you said means anything when the sub does all of it's due diligence, and submits a payment app for let's say 80% work completed, and the owner turns around and only approves payment for 60% work completed. In my experience, no GC has ever stepped to the plate to help me get what is actually due to me, they rather keep try and keep the relationship with the owner for future projects than do what is right and help their subs get paid. If it wasn't for the subs, the GC would be nowhere. Just to clarify, I haven't bid to a GC in 10 year, I bid all my contracts directly to the owner as a Prime for the individual bid packages I cover. This is not to say that all GCs are unethical, however it seems that there are many more unethical ones than ethical ones.

 

 

COMMENTS

Thank you for the good writeup. It in fact

was a amusement account it. Look addvanced to more added agreeable

from you! However, how could we communicate?
Posted by: Witmer - Monday, February 24, 2014 5:51 AM


 









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