By Bruce Jervis
Prime contractors are frequently required to release retained subcontract payments when the project owner releases retained prime contract payments to the contractor. This obligation may be imposed by the terms of the subcontract or it may be imposed by a “prompt payment” statute. In either case, the rationale is that the subcontractor’s portion of the retainage should be passed through to the sub once the owner is no longer retaining those funds to assure project completion.
On a recent California public works project, the prime contract allowed the owner to stop withholding 10% retainage from the contractor’s progress payments once the project was 50% complete. When the owner stopped withholding retainage from the contractor, the contractor stopped withholding 10% retainage from a subcontractor’s progress payments. Yet, the sub claimed the contractor violated a prompt payment statute by not immediately releasing the retainage the contractor withheld during the first half of the project.
This was not an abuse of subcontract retainage. The contractor was only withholding funds that had been withheld by the project owner from the contractor. A court ruled there was no violation of the prompt payment statute. But in many cases, prime contractors do withhold excessive retainage from subs or hold the retainage for too long. Have you seen instances of prime contractor abuse of subcontract retainage? Your comments are welcomed.
