What is Retainage?
One of the outdated tools in the construction industry is retainage. This is when owners and prime contractors retain a percentage of payments that otherwise are owed to subcontractors pending completion of certain agreed upon project milestones.
While a 10% base retainage is still too frequently used, many public and private jobs have limits of 2% to 5%. It is increasingly common to retain no additional funds after a job is 50% complete if job progress is satisfactory. However, a prime contractor may use a predatory retainage clause that can be destructive to a subcontractor’s ability to collect payment.
How to protect yourself from Predatory Retainage Clauses
A subcontractor should look out for subcontract language that unfairly hampers its collection capability. Some subcontract language does not allow for a reduction in a subcontractor’s retainage to the same extent that the owner reduces the prime contractor’s retainage. If the owner releases retainage for a subcontractor’s portion of the work, the subcontractor should be entitled to the money.
Whenever practical, a subcontractor should find out the percentage of retainage in the prime contract, and also whether retainage is to be reduced or eliminated as certain milestones are achieved. A prudent subcontractor would then make sure that it received the same entitlement.
Some subcontract language delays the release of retainage until the entire project is complete and paid for in full. This usually is much later than completion of an individual subcontractor’s work. A wise subcontractor will make sure that release of retainage hinges on the date of completion of its own part of the work. Many early finishing trades routinely negotiate payment terms that either involve no retainage or early release of retainage.
Avoid “Backcharges”
A subcontractor also should watch out for subcontract language that allows delays of funds until the end of the job and then only provides for payment after deducting unauthorized or unsubstantiated backcharges. If a subcontract provides for prompt pass-through of owner payments, the subcontractor’s cash flow is improved and the funds are not available to the prime contractor to assert back charges and offsets for work not authorized by the subcontractor.
How Retainage hurts both client and subcontractor
If a prime contractor is retaining more from its subcontractor than the balance it is owned by the prime contractor for completion of the project, there is an obvious disincentive for the prime contractor to finish the project. Jobs have dragged out for years and subcontractor retainage remained unpaid on one pretext or another, in spite of the fact that the owner had released practically all project funds to the prime contractor. In addition, protracted retainage may put subcontractor lien and bond rights in jeopardy if filing of required notices must be made within a short period of last performance of jobsite work.
Release of retainage to subcontractors upon substantial completion of their work is beneficial to both owners and enlightened prime contractors. This practice is known as line-item release of retainage. It motivates each subcontractor to complete its work as soon as practical, instead of holding off until the slowest trades on the job are ready to finish.
It is not unusual for a prime contractor to seek authority in the subcontract to hold back 100 percent to 200 percent of the estimated cost of unperformed work. This is reasonable because it offers further motivation for each subcontractor to complete all of its work quickly. This obviously is more appropriate than the practice of retaining large amounts of money pending completion of a few minor items of work. In addition, it also is wise to make sure there is a provision in the subcontract for payment of interest on delinquent prime contractor payments.
Generally, it is best to get a reasonable interest rate established specifically in the subcontract. Entitlement to interest can be used as positive leverage to speed up payments. For more information on negotiating improved retainage terms, see ASA’s no-cost benefits available to ASA members by logging-in under “LogIn/Access Member Resources” on the ASA website.
