Construction Law Today : Construction Lawyer & Attorney : Joshua Glazov : Design Build Contracts, Construction Bankruptcy

The Question

Reader Gil Anko asked this question on a past post about retainage:

If the contractor fails to request the release of the funds retained, is there a statute of limitations within which contractor must request release of the retainage???

The answer: yes.

How Long Does It Run?

How long is the statute of limitations on a claim for unpaid retainage? Like so many legal questions, the answer is: it depends.  And it depends principally on two things:

• The contract, and
• The law governing the relationship between the working side and the paying side

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In this past post and this past post too I mentioned a bill (HB344) in the Illinois General Assembly to amend the Illinois Contractor Prompt Payment Act putting caps on retainage under private construction contract and subcontracts.   

This bill stalled in the spring.  But it's active again.  It's been assigned to the Senate's Assignments Committee and will then go for further action from there.

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The Illinois Senate is considering a bill to amend the Illinois Contractor Prompt Payment Act (the "Act") affecting when and how (1) owners pay prime contractors and (2) prime contractors pay their subcontractors.

If enacted, this bill (HB 0344) will:

• Limit retainage on private construction projects to a maximum of 5 percent of payments to prime contractors and subcontractors.
• Limit retainage after 50 percent completion to a maximum of 2.5 percent.

This bill has already passed in the Illinois House. The Senate Assignments Committee is now considering this bill.

If enacted into law, this bill will limit how much retainage owners and prime contractors may hold and when they may withhold it. This bill will also affect (1) construction lenders' relationships with their borrowers and (2) sureties' relationships with the contractors and subcontractors they bond.

If you would like to comment on this bill:

• Contact your Illinois State Senator and the members of the Senate Assignments Committee; and
• Contact the government affairs staff of interested trade associations like these:
• Associated General Contractors of Illinois
• The Builders Association
• Illinois Construction Industry Committee
• Building Owners and Managers Association International
• International Council of Shopping Centers

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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.

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What's Retainage?

"Retainage" is law talk for money that an owner, or a contractor, withholds from an interim payment to pay at a later time. Construction contracts - and here I mean both prime contracts and subcontracts - usually provide for retainage. The owner often withholds retainage money from the prime contractor until the prime contractor

substantially completes all of the work. And the prime contractor usually withholds retainage money from subcontractors until they complete each of their respective parts of the work. Sometimes subcontractors withhold retainage money from sub-subcontractors, and so on down the line.

If you'd like to see what the retainage provisions in a contract look like, try

Section 5.1 of the American Institute of Architects A101 Owner - Contractor Agreement for a lump sum construction contract.

Why Have Retainage?

Why do owners and contractors withhold retainage?

• It's security for performance. If full payment is deferred until completion, the contractor has a good incentive to complete it. They have "skin in the game" until the game ends.
• It's also a reserve of money that an owner can draw on if the original prime contractor doesn't perform and the owner has to replace the original contractor with a substitute contractor at a higher price. A substitute contractor usually costs more. And the owner may use money they withheld as retainage to pay the extra cost. Prime contractors do the same in case they have to replace a subcontractor.

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