By Bruce Jervis
Construction contracts usually allow the project owner to retain a portion of each progress payment, typically 10%, until completion of the work. The purpose is to protect the owner against incomplete or deficient work. This retainage, which can accumulate to a substantial sum, provides the owner with more than just protection. It also gives the owner significant leverage in a dispute with the contractor.
A public project owner in California delivered a written notice of default to its contractor. The contractor strongly contested the allegation of default. The owner ignored these protests and accessed the retained funds for the purpose of bringing in a replacement contractor.
The contractor argued there had been no judicial, or even administrative, determination of a default. The owner could not just unilaterally grab the retained funds. A California court disagreed. The project owner could access the retainage based solely on the owner’s written notice of default.
The owner’s right to retained funds is not absolute. An owner can later be held liable for breach of contract. Public project owners may be subject to penalties established in public procurement statutes. But the ability to immediately reach retainage based on a unilateral written notice of default is a powerful weapon. Are project owners always fair or reasonable in their exercise of this right? We welcome your comments.