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