ConstructionPro Week, Volume: 4 - Issue: 6 - 02/13/2015

Does Retainage Provide Owners with Too Much Leverage?

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.

COMMENTS

Bruce, Thank you for your article. We are a prime contractor for a LARGE U.S. infrastructure and engineering company doing DoD work in Colorado. We have completed two major projects for this company, successfully, on time, on budget and safely! It baffles us that they are holding our retainage for a year from the final acceptance date! This is unusual and not normal. Your thoughts and suggestions would be appreciated.
Posted by: O.C.W. - Friday, February 13, 2015 10:58 AM

Informative article! I work for a small flooring company in Florida. Although I've not experienced year long retainage wait-times, the process to obtain this final payment can be exhausting! Is it used as leverage - absolutely!
Posted by: LEAH V. PITT - Friday, February 13, 2015 11:27 AM

The contractor is vulnerable at this point, all of a sudden, "this is not right, and this needs to be done, extras pop up not in contract", they hold your money hostage!, make sure everything is in writing.
Posted by: tommy c. - Friday, February 13, 2015 11:46 AM

As a sub electrical contractor, retainage can possibly drive a subcontractor out of business. if you're waiting retainage from multiple prime contractors you may not have the working capital to, keep your guys paid, keep the lights on,the trucks running and all the other wire and etc. there's gotta be a solution,anybody?
Posted by: Jibrael Shahid - Saturday, February 14, 2015 12:12 AM

the burden of retained funds is not unique. Each contractor must manage not only his existing contracts/projects to receive his earned funds, but he must also insert compensation for the time cost of money into a project when he is bidding the work. it is a competitive marketplace. the fact that a subcontractor has realized this vulnerability is the first step toward managing the risk. it all boils down to money.
Posted by: J Knight - Monday, February 16, 2015 11:01 AM

As an owners rep, holding funds for a year is unacceptable. In Canada, once the Contractor has achieved Substantial Completion (Approx. 97%) and verified by the consultant team, the major lien fund must be paid within 45 days. (The Lien Act) The owner can still hold a minor lien fund for deficiencies and seasonal work and disputed items. On larger projects the hold back can be millions of dollars and retaining it all for a year can put sub's out of business. No one wants to see good sub-trades go under. If a contractor agrees to this by signing the contract, he is aware of the hold back going in and should plan for it. If you disagree, you should not bid and let the owner know why. If all the contractors refused to bid, you may force them to revise that provision in the contract.
Posted by: M.J.Schneider - Wednesday, February 18, 2015 9:41 AM