Revisions to retainage laws welcomed by tile contractorsBy Bart Bettiga, NTCA and Greg Preves, Curran Group Inc.
All tile contractors have undoubtedly encountered a “retainage” clause in contracts for both private and public projects. This clause allows the project’s owner or general contractor (GC) to withhold a certain percentage of each progress payment until satisfactory completion of the entire project. Owners and GCs argue that retainage is necessary to assure completion of the project in a timely and workmanlike manner.
The most common retainage provision allows the owner or GC to withhold 10% from every progress payment made to the contractor. The sums retained are then released as part of the final payment made after the entire project has been completed and accepted by the owner. Occasionally, the contract provides for the reduction or elimination of retention after completion of a certain percentage of the work.
Tile contractors should carefully consider the impact of retainage provisions. At the very least, retention means that the contractor will have to complete all work before the release of withheld payments. As a result, contractors may have to pay vendors for tile and installation materials long before all of the necessary funds to pay for such materials are released. Additionally, where the release of final payment is contingent upon the owner’s acceptance of the entire project, retainage will be held until all contractors have satisfactorily completed their work. This means that final payment could be held for long periods of time due to third-party performance issues over which the tile contractor has no control.
In an environment of dwindling profit margins, retainage often exceeds the amount of the contractor’s profit. Not only does this situation present liquidity challenges, but extends the contractor’s exposure to the risk of owner or GC insolvency. Tile contractors are also vulnerable to unscrupulous owners and GCs who may purposely delay payment to assist in financing the job or as leverage to resolve work issues or claims.
Although retainage is a contractual issue, tile contractors should be aware that many states have begun to impose limits on contractual retention requirements. Thanks to hard work by groups like the American Subcontractors Association (www.asaonline.com) and the Associated General Contractors of America (www.agc.org), such legislation continues to move forward. Tennessee has enacted a law limiting retention in both private and public projects to 5% of the contract amount. The law requires that retention funds be released within 90 days of the contractor’s completion of the work. In North Carolina, new legislation limits retention to 5% on public projects over $100,000, and prohibits further retention after 50% of the project reaches “satisfactory” completion. In total, 40 states have enacted laws specifying a maximum retainage percentage for public and private work.
Some states have gone further to limit retention rights. In lieu of retainage, 21 states allow contractors on public projects to post security such as a bond, certificate of deposit, or letter of credit. Mississippi, Oregon, and Tennessee offer a similar alternative on private jobs. Meanwhile, some states require that retainage held on certain projects be placed in interest-bearing escrow accounts, such as California, Kansas, Ohio, Oregon, Tennessee, Virginia, and Washington for public projects and Connecticut and Ohio for private projects.
Many states have enacted prompt payment requirements that provide for substantial monetary and criminal penalties. New Mexico imposes the most restrictive limits, requiring that retainage funds be released separately as each individual scope of work item of the project is completed.
If you are a tile contractor who works on commercial projects, you should be aware of the retention obligations at the time of the bid, and negotiate these terms with the owner or GC prior to signing a contract. If you are uncomfortable with the requirements, consider requesting a reduced retainage percentage or a specific deadline for retention release.
You also need to be aware of the retainage laws in the state where the project is located. Several contractor association websites provide summaries of the retention laws in all 50 states. Visit these resources for more information:
• American Subcontractor’s Association: http://www.keglerbrown.com/File%20Library/Unassigned/2008-asa-retainage-summary-publication.pdf
• This 2004 paper from the American Subcontractor’s Association is a bit older, but gives an excellent in-depth discussion of the topic and discusses the approaches of many different states: https://www.asaonline.com/eweb/upload/Retainage%20Report%20for%20CKD.pdf
• This survey was produced by the law firm of Holland & Knight: http://www.hklaw.com/files Uploads/Documents/Alerts/Construction/01-20-12.pdf
To the extent contractual retainage requirements violate state law, they are unenforceable and should be removed from the contract. The goal is to draft a retention provision that fairly balances the owner or GC’s need for timely project completion with the tile contractor’s need for timely payment. A little time spent addressing this issue at the beginning of the project may save a major problem down the road.
Greg Preves is a staff attorney for Curran Group, Inc., parent company of Crossville, Inc. Founded in 1986, Crossville, Inc. is a U.S.-owned and operated manufacturer of award-winning porcelain stone tile collections for residential and contract applications.