Gavin Howe
Construction contract retention, also known as retainage, is a percentage of a contractor’s fee that is withheld until they finish a project. The percentage is typically between 5-10% of the total contract price, but this can vary depending on the contract, the complexity of the project, and local regulations. Retention laws differ across states, with some states capping retainage at 5% and others at 10%. For example, in California, retainage is capped at 5% for public projects, while in Alabama, it is capped at 5% for public projects and 10% for private projects. Retention money is intended to incentivize contractors to complete a project to the agreed specifications and to cover any defects that arise within the defects liability period. To avoid disputes, it is important to have clear documentation and open communication between the client and contractor, as well as to understand the specific laws and regulations that apply to retention in construction contracts.
| Characteristics | Values |
|---|---|
| Purpose | To act as a warranty for property owners, ensuring contractors complete a project to the agreed specifications. |
| Amount | Usually 5-10% of the total project cost, but this varies by state and contract. |
| Timing | Retention money is typically held until the end of a project or defects notification period. |
| Payment Process | Invoicing, billing, and payment processes should be standardized and automated to ensure timely payments. |
| Record-Keeping | Clear and accurate documentation is essential for tracking payments and resolving disputes. |
| Legal Remedies | Many jurisdictions have laws or guidelines regulating retention practices, including maximum percentages, timelines, and dispute resolution processes. |
| Cash Flow Impact | Retention can cause cash flow issues for contractors, subcontractors, and suppliers, affecting their ability to pay and maintain profit margins. |
| Dispute Resolution | Disputes over retention are typically addressed through contract provisions, negotiation, or legal remedies. |
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What You'll Learn
Retention laws vary across US states
Construction retention, also known as retainage, is a percentage of a contractor's fee that is held until they finish a project. It acts as a warranty for property owners, ensuring that the contractor will complete the project to the agreed specifications. While retainage is a common practice in the construction industry, the specific laws and regulations governing it can vary across US states.
In some states, such as California, there are caps on the amount of retainage that can be withheld. For example, in California, owners and primary contractors cannot retain more than 5% of the contract price. In contrast, other states, like Arizona, allow for higher retainage rates, with a maximum of 10% for publicly funded projects. For private projects in Arizona, owners may withhold a "reasonable amount of retention" to cover any expected costs or expenses for which the contractor is responsible.
The retention period, or the length of time that retainage can be withheld, also varies by state. For example, in Arkansas, owners must pay retainage to the contractor within 30 days, while in Louisiana, the retention period is 45 days. Additionally, the starting point for the retention period may differ between states. In California, the retention period begins on the "date of completion," while in Louisiana, it starts from the "formal acceptance of the work."
It is important to note that retainage laws can also vary depending on the type of project, such as public versus private projects. For public projects, the amount of retainage is typically determined by state laws, while private projects may allow for more negotiated terms. Furthermore, retainage laws may intersect with other legal areas, such as Security of Payment laws, which allow funds to be held due to disputes.
Given the variation in retainage laws across US states, it is crucial for both owners and contractors to understand the specific laws and regulations in their state before signing a construction contract. This includes familiarizing themselves with local regulations, contract terms, and dispute resolution processes to ensure fair practices and minimize conflicts.
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Retention percentages
Retention in construction contracts is a fixed percentage of the total payment due for a contract, withheld from each progress claim and not paid until the project is complete. It is often included in construction contracts to serve as a financial safeguard, ensuring that the head contractor or subcontractor delivers on their promises and upholds the agreed-upon quality of work. Retention payments reduce the risk for owners by ensuring contractors meet their contractual obligations. They also reduce risk for primary contractors who rely on subcontractors and suppliers.
The retention percentage is typically deducted from each progress payment. Certain states require the full retention to be withheld early in the project, either by a specific payment number or by project completion milestones. Retention is not typically intended to cover project delays unless delays result in additional costs related to defect resolution or unmet contractual obligations.
The retention percentage varies depending on the location and the contract. In the US, retention percentages range from 5% to 10% of the full project cost. For example, in California, owners and primary contractors cannot retain more than 5% of the contract price, while in Arizona, the maximum retainage is 10%. In Alabama, the maximum retainage allowed is 5% for public projects and 10% for private projects. In New York, a "5% Retainage Law" was enacted in November 2023, limiting the amount of retainage that can be held from general contractors and subcontractors to no more than 5%.
The retention percentage may also vary depending on the stage of the project. For example, the percentage may be reduced from 10% to 5% when the project is halfway through. In some states, the retention rate is 5% for the first half of the project, and no retainage is held in the second half.
It is important to note that retention laws and regulations can vary by state and even by locality. Therefore, it is crucial for owners and contractors to understand the specific laws and regulations applicable to their jurisdiction before signing a contract.
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Retention timelines
The duration for holding retention money is outlined in the contract and is influenced by the project's complexity and local regulations. Some jurisdictions allow funds to be withheld due to disputes under Security of Payment laws. For instance, a contractor may complete a project and request final retention payment, but the client may refuse to release the funds until defects are rectified. While retention money should be released on time, such disputes can cause delays.
Contractors should carefully review their contracts to understand the specific retention timelines and ensure compliance. Adhering to best practices, such as maintaining accurate records and timely payments, can help contractors manage retention money effectively and minimise disputes.
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Retention disputes
In the construction industry, retention laws vary from state to state, and retention disputes are common. Retention, also known as retainage, is a percentage of a contractor's fee that is held until they finish a project. It acts as a warranty for property owners, ensuring that the contractor completes the project to the agreed specifications. While retention incentivizes contractors to complete projects properly, it can also create cash flow issues for them.
Another common issue in retention disputes is the length of the retention period. The retention period can vary depending on the contract, the complexity of the project, and local regulations. Some states have specific timelines for retention payments. For example, in Arkansas, owners must pay retention within 30 days, while in Louisiana, it is within 45 days. Understanding the local regulations and the specific timelines outlined in the contract is crucial for both contractors and project owners.
To resolve retention disputes, clear documentation and open communication between the client and contractor are key. Many jurisdictions have laws or guidelines that regulate retention practices, including maximum percentages, timelines for release, and dispute resolution processes. Contractors should carefully review their contracts and be familiar with the local regulations to understand their rights and ensure they receive the retention money they are entitled to. Construction management software can also help all parties proactively manage contract variables and track payment obligations.
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Retention alternatives
In November 2023, the State of New York enacted the "5% Retainage Law", limiting the retainage amount that can be withheld from general contractors and subcontractors to 5% or less for many private construction contracts. This law also allows contractors to invoice for retainage at substantial completion.
In the UK, performance bonds and parent company guarantees have been used as retention alternatives for decades. Performance bonds guarantee the performance of the work, and compensation is usually financial in the event of failure. However, the wording of the bond can sometimes be problematic. On the other hand, bank guarantees can be used instead of retention money to provide project owners with financial security while reducing the cash flow impact on contractors.
In addition to performance bonds and bank guarantees, the following alternatives to retention have been identified:
- The Housing Grants, Construction and Regeneration Act 1996 (as amended) outlaws 'pay when paid' clauses, which deny subcontractors their retention payments until they are released under the main contract.
- JCT has a dedicated enabling clause in most of its standard-form contracts, with published template bonds.
- UK government GC/Works contracts (now withdrawn) and the Association of Consultant Architects (ACA) PPC family contain options for bonds dealing with retention and performance.
- The Infrastructure Conditions of Contract (ICC) suite allows for choices similar to the ACA PPC family.
- RIBA Concise and Domestic Building Contracts have provisions for an optional insurance-backed guarantee.
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Frequently asked questions
Retention in construction law is a percentage of a contractor’s fee that is withheld until the project is finished. It acts as a warranty for property owners, ensuring that the contractor completes the project to the agreed specifications.
The retention percentage is typically between 5-10% of the total contract price. However, this may vary depending on the contract, project complexity, and local regulations.
Retention money is often released in two stages: half upon substantial completion, and the remainder after a defects liability period, which is usually 12 months.
No, retention agreements are also used in employment contracts to incentivize key employees to stay through critical periods.
There are federal, state, and contractual rules regulating retention in construction contracts. Each state may have its own laws regarding maximum retention percentages and timing of release. Additionally, local regulations may dictate maximum retention holding periods.
