Our previous blog in the Contractor Blog Series covered the topic of Change Orders. In this third installment of the series, we take a look at “Retainage”.

Retainage

            The release of retainage is often a tricky last item to be dealt with on a construction project which results in the greatest leverage for the owner and the greatest source of pain for the contractor.  "Retainage" consists of contract monies earned by the contractor for work that is performed on the project that the owner is allowed by the terms of the contract to withhold from payments to the contractor until the close of the job.  While the terms of a contract will typically govern retainage including when and under which conditions it can be released, contractors should be aware of some things right up front.

            The very purpose of retainage is to protect the owner from the contractor.  That is, by retaining funds, the owner will have leverage to make the contractor return to the project to finish punch list items in the event there is some dispute, remedy any allegedly defective work, and may act as a means to encourage a discharge of liens placed on a property.

            With respect to how retainage is formulated, it is generally a percentage of the subject contract.  Therefore, in a typical construction contract, a figure (ex. 10%) will be withheld from each payment to the contractor.  Bear in mind that this is contract specific, but as contractor you want to negotiate as low a retainage as possible.  On larger scale construction projects, retainage is a critical issue and potentially significant funds will be withheld until the project is completed. The owner has an incentive to withhold a larger retainage while the contractor conversely wants to get paid as much money promptly with the least amount withheld.

            While negotiation concerning the percentage withheld typically calls for a "business decision" on the part of both the contractor and the owner, terms impacting retainage often are not contemplated and do not make their way into the subject contract.  Bear in mind that the contract will govern and, if the contract is silent on the mechanics of retainage, the contractor will have to look to the Court for guidance as to the details of the retainage release.

            Terms that can be added or further explored in the contract include how the owner must hold the retained funds (i.e. in an interest-bearing account or not), under what circumstances the retainage may be used/appropriated by the owner in the event of a dispute between the owner and the contractor, or whether the retained funds can be withheld by the owner outright in the event of a termination short of completion.

            As is often the case in construction disputes owners will attempt to use retainage as a "bargaining chip" to lessen or offset claims.  Bear in mind that short of litigation, retainage is money earned and owed.  Therefore, like any other term in your contract, it is due when the conditions of the contract are met and subject to all other payment terms agreed upon in your contract when that retainage release becomes due and owing.

            In short, retainage is an instrument of the owner which is justifiable and necessary in some large-scale contracts.  To minimize your risk of retainage being utilized as a post-contract negotiating bargaining chip, it is recommended that your retainage clause come with clear and specific mechanism for how retainage is held (in an interest-bearing account); when it should be paid; and the step-by-step process that the Owner must comply with in order to withhold timely payment of same.   

            There are numerous issues that arise in the Contract process and the foregoing merely touch on a few.  Your specific circumstances will require specific advice and counsel.  Please contact Joseph Petrillo at jpetrillo@hoaglandlongo.com or call 732-545-4717 for more information, and be sure to check in next month for OSHA - the next installment of our Contractor Blog Series. Stay tuned!