This article is taken from a webinar that was presented by SunRay Construction Solutions and Alex Barthet. Alex is a board-certified construction attorney, who serves clients in the state of Florida. In this article we will discuss how to get your retainage in construction paid faster. The following points will also be discussed:
What is retainage in construction?
For those who do not know, retainage is an amount of money that is held back during the course of construction, and it typically serves two purposes:
- It is intended to create some type of incentive for the construction contractors to finish. Nothing is a better incentive to finish your work than actually getting paid; and
- Gives the owner some protection in the instance where work is not completed, and they have to pay someone else to finish it. They are holding back a little bit of money to allow them to do that.
Retainage is typically 10%, but aside from public projects which will be discussed in the statutes that govern it. It is a contractual understanding, which means that it does not have to be 10%. Sometimes for example, it is advised that instead of offering to provide a payment and performance bond, holding 15% or 20% is a way to provide some additional security, and to have some give and take in the process.
So do not assume that it absolutely positively has to be 10%. It can be any amount that you and the other side are willing to negotiate.
Retainage on Private Projects
Let us talk about retainage on private projects.
a. There are no laws governing retention on private projects
We are going to get deep into the weeds on the state laws governing retainage on public projects. But know that on private projects, there is no rule or construction law that mandates retainage has to happen, mentions what retainage amounts have to be held, or how retainage is governed.
It is 100% controlled by what is in your construction contracts. So how do you figure out what the retainage is supposed to be? You are going to have to look at your contract. So keep the following things in mind depending on where you are in the chain of contracts.
b. As general contractor, try to get early release of retention into your contract with owner
Obviously as an owner, you want to try to hold retainage. Typically, that is 10%. But as mentioned above, it can be any amount that you can negotiate. The standard is 10%. As a general contractor, you want to try to get early release of retainage as a provision in your construction contract.
Obviously, you would like the least amount held if you were the general contractor. In an ideal world, you would have no retainage held. You would want all the money paid every time you submit a bill. Some of the things that you will see happen during the course of construction or the course of negotiating a construction contract are people carving out things about what is and is not included in retainage.
For example, it is not uncommon to see a provision that says retainage is 10%. But no retainage will be held on the general contractor’s general conditions or fee. So that is a way to carve out some aspects of the amount that is being withheld by the project owner.
Staying with the general contractor, one of the things you want to make sure that you always do is ensure that any retention that is being held by you is a flow-down to your subcontractors. This means that you do not want to find yourself in a contractual situation where retainage is held against you by the owner.
c. Make payment of retention to subcontractors ‘conditioned’ upon receipt of funds from owner
But you are contractually obligated to pay retainage early to your subcontractors. So what you want to do is make sure that retention to your subcontractors is conditioned upon receipt of those funds by the owner.
d. The same applies for subcontractors in your subcontracts
The same is true for subcontractors in your subcontracts, meaning that when you are negotiating the subcontract, you as a subcontractor want to try to get retainage released early. If you have sub-subcontracts, you want to make the retainage due to them, conditioned on your receipt of those retention funds by the contractor.
So now let us take a look at a sample contract provision on getting retainage released early. The above is a provision designed for a subcontract favorable to a subcontractor and it reads as follows:
As this provision describes, it says that as a subcontractor you are entitled to half of your retainage when you are half-way through the project. Now these are relatively common, but arbitrary milestones. You could say that you want half of your retainage at 50%, and then another 50% of your retainage at 80%.
Contractually, you can agree whatever you want as long as you get the other side to agree, and it shows up in your construction contract.
e. If your contract is silent on release of retention, it will be held until final completion
Now, if your contract is silent on the release of retainage, then much more likely than not, your retention is going to be held 100% until full and final completion. So, what does that mean? It means that if your contract says they are going to hold retainage, but it has no early retainage release provision, then that 10% is going to be held until the very end of the job.
So it should be an item that you are actively negotiating. Just like you negotiate the scope, the price, and the schedule, you should actively negotiate when retention is released. What is typically seen on the subcontractor’s side is that contractors are more than happy to release retainage.
This is so long as it is released to them by the owner. But as indicated earlier, they will almost always make it a condition of payment to you. The payment to the contractor by the owner of retention is the condition of the contractor paying you your retention as a subcontractor. So that is not an unreasonable request.
What you want to marry that with, if possible, an obligation for them to ask the owner so that you can increase the likelihood that it happens. They will have to make the request that retention is drawn down.
Retainage on Public Projects
Now we will talk about retainage on public projects. Unlike private projects where there are no laws, for Florida construction projects, there are very specific provisions that deal with the release of retention.
a. Maximum retainage rates on government construction projects are reduced
In the year 2000, the law was changed. The old law was that you would be able to get half of your retention when you were halfway through the project, so you would reduce retention from 10% to 5%.
b. New law applies to contracts advertised for bid or entered into by state/local government entities
That changed with a recent amendment to various statutes, to now a flat 5% throughout the life of the entire project so long as the project is in excess of $200,000. This means any project that was advertised for bid or entered into by any government entity after October 1, 2020, has a flat 5% retention throughout the course of the project.
This is great news because it significantly reduces the amount of retention being held from the outset of the project. That is from 10 to 5%. It makes a big difference in a contractor’s cash flow and that flows down to all the subcontractors and sub-trades as well.
c. Law repeals ability of contractor to submit payment requests to public entity for up to half of retained amount
What it does though, is it repeals the ability for the contractor to request half of the retention at 50% completion. This means that because now it is 5% instead of 10%. You do not get the opportunity to reduce it from 5% to 2.5% at 50%.
So it is going to say 5% from the beginning of the job to the end of the job. That is the give and take with that statute.
d. Law repeals contractor’s ability to withhold more than 5% of each progress payment to subcontractors
It also prevents the holdback of more than 5% when you have to pay your subcontractors. So, the law requires that that retention holdback of 5% applies not just to the general contractor, but to all of its subcontractors as well.
e. Retainage requirements apply to all state and local government construction projects, with exceptions
So this applies to every state and local government construction project in the state of Florida. There are certain limited exceptions. They are so insignificant that they are quite frankly not even worth talking about.
f. Law does not apply to contracts executed by FDOT under Chapter 337
But this does not apply to Florida Department of Transportation (FDOT) projects. So this 5% does not apply to FDOT projects which are governed by Chapter 337 of the Florida statutes.
g. What to do when project has reached substantial completion
Now, once a project has reached substantial completion the following happens:
i. On projects under $10 million: Retainage is due within 30 days
On projects under $10 million, retainage is due within 30 days.
ii. On projects over $10 million: Retainage is within 30 days, unless extended by contract
However, for projects over $10 million, retainage is due in 30 days unless it is extended by contract. Meaning your contract can require that it be held longer, but it can never exceed 60 days.
iii. If good faith dispute exists, public entity may withhold up to 150% of value of work to be completed
On top of that, the municipal authority, to the extent that a good faith dispute exists, can withhold up to 150% of the value of the work to be completed. So it gives them an opportunity to hold back some portion of the retainage so long as there is some type of dispute related to incomplete punch list or work that they are not satisfied with.
iv. Once retainage has been released to the general contractor, retainage must be paid to subcontractors in 10 days
Now if you are a general contractor, once you have received retainage, you must pay your subcontractors that retainage within 10 days.
v. Subcontractors must pay subcontractors and suppliers within 7 days after getting retainage
If you are a subcontractor and you receive that retainage payment from the general contractor, you have to make that payment within seven days.
vi. Untimely retainage payment subject to 1% per month
Failure to make timely payments along the chain whether that is from the municipal authority to the general contractor, from the general contractor to the subcontractor, the subcontractor to the sub-subcontractor or supplier, the party that has been aggrieved, has the opportunity to make a claim for up to 1% per month of additional interest.
So even if your contract says that you are only entitled to 1% per year of interest, with respect to this retainage that is being withheld in violation of the statute, you are entitled to 1% per month. It is very rare that anyone is going to get so animated over the unpaid amount that they are going to demand and get paid the 1%.
That being said, if it has been withheld long enough and it is a significant amount of money, it could add up to real dollars.
v. While not able to change foregoing as general contractor, add early retainage in contract as subcontractor
While not able to change the foregoing as a general contractor, adding early retainage release in your contractors on a public job is still very important as a subcontractor. So you should know as a general contractor that you are governed by the provisions in this statute.
The municipal authority has to comply with those rules and even if you are a subcontractor, they still have to comply with those rules with the general contractor. But that does not mean that you cannot negotiate something potentially better as a subcontractor.
So for example, if you are a subcontractor on a public project, you may want to try to include an earlier release of retainage in your contract with the general contractor’s earlier release of retainage. So that is even less than the 5%.
It may not work but if you get it, put it in your contract. That is a contract provision between you and the general contractor even though they may not be entitled to their retainage. They are technically obligated to pay you again.
It is pretty rare that you will see a general contractor find themselves in the pinch of having to pay subcontractors because they always make it conditioned on receipt by the owner. But having a contract provision is always very helpful.