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?
