Case Study: Managing Retainage Clauses

Contractual agreements comprise some of the most sensitive aspects of construction, and retainage can be a difficult element to handle in these contracts. Charles Weiss of Scaffold Resource LLC asks CBO the following:

How should retainage clauses be managed in construction contracts?
  
Debbie Cazan
Partner
Alston & Bird LLP
“Generally speaking, most owners withhold 5- to 10-percent retainage from each progress payment made to a contractor on a construction project. As a middle ground, parties sometimes agree that an owner may withhold 10-percent retainage until the project is 50-percent complete, at which time the retainage is reduced to 5 percent. Generally speaking, owners withhold retainage in order to provide some protection against contractor defaults. When a contractor is in default at the time of substantial completion (due, for example, to delayed completion or liens against the property), an owner will continue to withhold retainage until the default is resolved or the owner is compensated for such default. If a contractor disagrees that a default has occurred, aside from the dispute resolution provision in the parties’ contract, which should be followed, a contractor may assert his or her rights under an applicable prompt pay act, if one exists in the state where the project is located. These statutes can be very effective in pressuring owners to make payments that are due and owing. Prompt pay acts generally allow an owner to withhold disputed payments, but high penalties may be imposed if an owner continues to withhold money where no good faith belief exists to do so.”
  
Marc Ramsey
Manager of Communications
American Subcontractors Association
“While the federal government has adopted policies strongly discouraging the use of retainage on federal projects, the practice of retainage remains prevalent in both public and private contracts. Excessive retainage can tie up subcontractors’ capital and, in some instances, can force them to borrow money to meet expenses. Retainage perpetuates adversarial relationships that marginalize and reduce individual and collective performances on the job. The very premise of retainage is based on lack of trust. Furthermore, the general contractor may have a disincentive to complete the project if it retains more from its subcontractors than the owner retained from it. The American Subcontractors Association recommends: ‘Customer shall not deduct retainage from subcontractor’s payments except to the extent of retainage held by project owner on subcontractor’s work.’”