ConstructionPro Week, Volume: 5 - Issue: 3 - 01/22/2016

Should Retention Be Used as Leverage against Claims?

By Bruce Jervis

The retention of a percentage of each progress payment is customary in the construction industry. The purpose is to protect a project owner or prime contractor against incomplete or noncompliant work by a contractor or subcontractor. The retained funds are released upon successful completion of the project to the parties that performed the work.

Sometimes the retention system is abused. Withholding 10% of another party’s contract payments provides considerable leverage. This can be used for purposes unrelated to the completion of the work in compliance with the contract documents.

In a recent California case, a prime contractor acknowledged that a share of retained funds released by the project owner was owed to a subcontractor. When the sub asserted a claim against the prime for delay and disruption, however, the prime refused to pay the sub its retention. A court ruled there had been no good faith dispute regarding the retention itself. The prime could not withhold retained funds as leverage against the because of claims or disputes that did not relate to the sufficiency of completed work? Does the implicit threat of delayed release of retention discourage parties from asserting legitimate claims? Your comments are welcomed.

COMMENTS

"Leverage" in this context is a polite euphemism for "ransom" or "hostage", which are more accurate. Retainage due and payable is often held without calculation or determination by the General Contractor and not paid until Mediation. By this time, the improper withholding has had the maximum inequitable effect on any negotiation, and the maximum deleterious effect on the cash flow and legal expense of the subcontractor. At this point, the equities of withholding improperly unpaid retainage turn somewhat, and the General Contractor is now faced with going to Trial or Arbitration with a hard calculation on paper disclosing the hard amount of improperly unpaid retainage, which creates new risk of being punished by the Trier of Fact for being the financial bully, and also now facing actual jeopardy for Prompt Pay liability, if the matter does not settle. How many mediated settlements have ever included payment to a subcontractor for Prompt Pay Interest due?
Posted by: James P. Laurie III, Attorney, Raleigh, NC - Friday, January 22, 2016 10:02 AM

I think many in the construction business view the purpose of the holding of retainage as protection against incomplete or noncompliant work, as stated by the author, Mr. Jervis. The best protection against those items is to pay less than 100% of a schedule of values line item thus clearly indicating that work has not been completed satisfactorily and also to have separate punchlist and project closeout line items to set aside a small part of the contract sum for those purposes. The real purpose of holding retainage is to protect against the failure of the contractor or subcontractor to pay his suppliers and subs. Retainage would only be paid after the expiration of the statutory lien period at which time materialmen and subcontractor liens can no longer be filed and the Owner has considerably less liability to have to directly pay the claims from such materialmen and subcontractors.
Posted by: Kurt Updegraff - Friday, January 22, 2016 9:46 PM

If a subcontractor has completed his scope of work and furnished a sworn statement and full unconditional waivers from suppliers and a written guarantee per the specs there should be no reason to hold retention.
Posted by: Jerry - Monday, January 25, 2016 7:43 AM

I disagree with Kurt - "Retainage would only be paid after the expiration of the statutory lien period at which time materialmen and subcontractor liens can no longer be filed and the Owner has considerably less liability to have to directly pay the claims from such materialmen and subcontractors." Subs and suppliers know their limitations in filing liens and often will file the lien even when all indications are that they will get paid. The most effective tool to expedite final payment is use of a lien waiver. Typically, our lien waivers are provisional to protect all parties - Upon receipt of $n,nnn the sub/sup waives the right to file a lien.
Posted by: Jim W., Omaha, NE - Wednesday, February 3, 2016 1:25 PM