ConstructionPro Week, Volume: 4 - Issue: 9 - 03/06/2015

Another Abuse of Owner Retainage?

By Bruce Jervis

 

A recent report on a project owner’s ability to reach contract retainage without any formal determination of contractor default prompted considerable comment. Now, another case illustrates the potential for owner abuse of retained contract payments.

Retainage is intended to protect project owners against mechanic’s liens and deficient contractor performance. But, it can also provide owners with a great deal of leverage in disputes with contractors. This creates a temptation for abuse.

 

One public project owner held $676,436 in retainage at the conclusion of construction. The owner had use and occupancy of the project and no complaints about the work. Subcontractors had been paid and there was no risk of liens. Yet, the owner held the retainage because the contractor had unresolved claims for extra work.

 

A California court ruled that this use of the retainage was improper. But there is a division of authority on this question even within the state courts of California. The rule is by no means universal or clear. What has been your experience? Do project owners sometimes use retainage to protect themselves against things other than liens and defective work? Do owners use retainage as leverage to extract favorable resolution of claims?

 

COMMENTS

We have had +/- $1.7MM in retention held by Wal-Mart for over two years now, because we have a claim against them for unpaid change orders...
Posted by: Michael DeMarie - Friday, March 06, 2015 11:40 AM


We have had the same problem with a city project for a 150 million dollar Waste Water Treatment Plant in Iowa. I think the city involved spent the federal grant money and now doesn't have enough to pay the 5% retainage so they keep coming up with warranty work and punch list. This has gone on for two years from the substantial completion date.
Posted by: Tony - Friday, March 06, 2015 12:05 PM


We are currently having problems collecting our retainage in two of our projects.

Every time we try to collect our funds, they come up with a fresh, new punch list. This has been going on for one year in one case and four months in the other.
Posted by: Marcos Dragoni - Friday, March 06, 2015 12:35 PM


Contractors are like hungry fish and they will take the bait no matter what every time and all the time. And to busy cutting each others throat. They need to unite better and demand better terms & conditions in the contract docs.
Posted by: Bryan - Friday, March 06, 2015 4:50 PM


The National AGC and other GC pac's and organizations should push for retainage reform, may have to be by states? It is abused more often than it is used correctly these days by most owners. We would suggest an owner may not hold over 2% retainage (warranty, punch, paperwork), once they accept and occupy a building for use. Occupation is acceptance of contract work for use, and they should have to file a legal claim or legal dispute (or not accept/occupy) to hold anymore if building is usable for its intended purpose and occupied ,which includes local authorities approval of same...a certificate of occupancy. This is a real problem in construction and is getting worse.
Posted by: Marty Gillam - Friday, March 06, 2015 5:00 PM


We frequently see utility clients not holding retainage funds but contractually requiring a warranty bond for the duration of the warranty which is often 10 years. The cost of the initial bond is not typically excessive, but remember you must multiply that by a factor of 10 as the bond needs to be renewed every year for the life of the warranty.

For example: A $5MM project with a 10 year warranty, based on 1% bond rate = $50k for 10 years = $500k which is a significant, in anyone’s world. IMO, the goal is to get the client to pay for the warranty bond as part of the bid in the contract requirements and release retainage funds in a reasonable time period.


Posted by: Steve Pick - Friday, March 06, 2015 5:56 PM


In the state of Louisiana, if the Substantial Completion has been legally met and the Contractor has a Clear Lien Certificate, you MUST release retainage. Value withheld for punchlist is a separate dollar value.
Posted by: ArchitectBabe - Monday, March 09, 2015 10:14 AM


 









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