As owners, contractors, and subcontractors start to apply the new Fairness in Construction Act, questions have arisen about how to apply the Act to the real world. One area causing questions has been the issue of retainage. The Act defines “retainage” as “money earned by a contractor or subcontractor but withheld to ensure proper performance by the contractor or subcontractor and that shall be paid upon completion of contractual obligations.”
Withholding retainage is standard procedure, but the Act imposes new duties on the owners of real property to pay retainage promptly upon attaining certain construction project milestones.
The Act mandates that owners, contractors and subcontractors may withhold no more than 10% of any undisputed amounts as retainage. After 50% of the construction project is completed, the contracting entity may withhold only 5% of the total contract amount. The language of the Act raises two difficult questions:
1. What amount of retainage may a contractor withhold from a subcontractor whose work is begun and completed before even 50% of the total construction project is completed, and
2. Conversely, what may a contractor withhold from a subcontractor whose work is begun after the construction project is more than 50% completed?
Under the first scenario, the contractor may withhold a full 10% during the duration of the subcontractor’s performance. Under the second scenario, that number is limited to 5%. It seems the contractor has an advantage during the first half of the project, but a disadvantage during the second half.
The Act offers no easy solution. As with any new law, the case law will provide an interpretation of the Act. Until the Act is further clarified, it will be safest so limit retainage to 10% during the first half of the construction project and then decrease it to 5% after 51% of the construction project is completed. Implementing the Act will require contractors and subcontractors to be sensitive to the ambiguity in the law.
However, the relationship between contractors and owners is unambiguous. Retainage is limited to 10% during the first half of the project and 5% for the second.« Back to news