Retainage Tips For Construction Contracts Part 2 - Early Release, Stopping, and Suspension of Retainage
In the last post we talked about what retainage is, why owners and contractors withhold it, and how much they customarily withhold. As promised, in this post we'll talk about releasing and reducing retainage before work is completely finished.
Early Release of Retainage
Contracts often provide for an early payment - referred to in trade vernacular as "release" - of retainage. Under prime contracts, the owner usually releases retainage that's allocated to subcontractor work that has been completed. This usually applies to retainage withheld on subcontractor work that starts and ends early in the project (e.g., demolition, excavation).
In most cases these subcontractors complete their work long before the owner must release retainage to the prime contractor (usually once the prime contractor substantially completes the entire work). Waiting until the prime contractor substantially completes the entire work is a long time for an early finishing subcontractor to wait, especially when they're waiting for up to ten percent of their money.
So subcontracts often require the prime contractor to release retainage to the early finishing subcontractors soon after the subcontractor completes their part of the work, regardless of when the prime contractor gets their own retainage from the owner. So the prime contractor usually wants to ensure their prime contract allows for early release of that retainage money from the owner too. That way the money due to the early finishing subcontractor comes from the owner, not from the prime contractor's operating cash or the prime contractor's lenders.
Owners and prime contractors agreeing to pay retainage early should consider some conditions on the early payment. They include:
- The architect must certify that the applicable subcontractor has substantially or finally completed their scope of the work in compliance with the drawings and specifications.
- The receiving subcontractor must request the early retainage payment (i.e., their first post-substantial completion application).
- The subcontractor must not be in default under their subcontract, nor would the giving of notice, the passage of time, or both, put the subcontractor in default.
- The prime contractor may continue to withhold retainage to the extent of unresolved claims by the prime contractor against the subcontractor.
- Any sureties bonding the subcontractor's or the prime contractor's work must first consent to the early release.
Retainage Stops and Suspension
Another way contractors reduce the burden of deferring retainage release is to stop, or reduce, the amount of retainage withholding at some point during the progress of the work. The most common stopping and reduction point is 50% of the way to substantial completion.
The result of stopping retainage withholding at 50% of the way to substantial completion is to cut retainage nearly in half. If retainage starts out at ten percent of each payment, and withholding stops at 50% of way to substantial completion, the total retainage withheld right before substantial completion is a little bit shy of five percent of the full contract sum.
Owners and prime contractors agreeing to stop withholding retainage before substantial completion should consider the imposing the same pre-conditions mentioned above applicable to early payment. They can also consider suspending retainage withholding instead of stopping it. That way, if the contractor defaults under a prime contract (or some event occurs that could mature into a default with the giving of notice or passage of time), then the owner, after giving notice to the prime contractor, may resume withholding retainage until the prime contractor cures the default. Prime contractors can apply the same measures under their subcontracts too.
Conclusion
So, if you're paying someone to provide construction work, you'll probably like withholding retainage until they're finished. It incentivizes them to finish on time and it gives you a reserve to pay the extra cost of hiring a substitute if you need to. If you're the one providing the work, your requests to pay retainage early or stop withholding it before all of your work is complete are fair and legitimate. The person who's hiring you should be prepared to agree. But also understand that they're often going to require that you satisfy certain pre-conditions to ensure timely performance and quality.
Construction Law Today is a legal blog about construction contracts, disputes, finance, and the people whose job it is to deal with them.
