Retainage is the requirement to withhold a certain percentage, usually of the contract price or the value of the work, until a certain period of time. This is done to secure payments owned to subcontractors, suppliers, providers of specially fabricated materials, and other persons tasked for a project.
Kelly Davis, Esq.
Few construction lawyers have the first-hand experience to understand fully the complex issues that their clients face. When Kelly Davis was a child, her father started a small residential construction business, and there began Kelly’s love of construction. She was the little girl that would be running all around the construction projects. Over the years, her father’s business grew into developing commercial buildings, and high-end residential homes. As a result, Kelly has grown up, worked in and lived around the construction industry her entire life.
In this CLE class clip, Kelly discusses retainage.
It is important to determine if your state requires anyone within the construction chain to withhold retainage. Then, you must determine, who must withhold; how much must be withheld; and how long must the retainage be withheld.
There are two types of retainage, statutory and contractual. Statutory retainage requires owners to retain, or withhold, a certain percent of the contract amount or value of the work completed from their subcontractors until a certain period of time. This is done to secure payments owend to subcontractors, suppliers, and providers of specially fabricated material.
Contractual retainage, is a contractual provision which requires a main contractor to hold back a certain percentage of retainage from their subcontractors for a certain period of time. This is different than statutory retainage that owners are required to withhold from the main contract.
The purpose of statutory retainage is to limit the owner’s liability to lien claimants. Usually the pool of retainage funds which are held back as statutory retainage, are shared by all claimants proportionately with a preference going first to individual artisans, and mechanics. After they are paid, the balance goes out to all other claims. Assuming the owner has done everything right, if you are slow to get your claim in the mix, it is possible that all the available funds could be paid out leaving no recourse against the owner.
A real life example of how retainage is used to pay lien claimants:
All valid retainage and other mechanic’s liens would be added up and be given a pro-rata share of the whole of the retainage amount ( plus perhaps trapped funds).
So for example:
- $100,000.00 contract with change orders
- $10,000.00 Retainage Owed by Owner
- Lien Claimant 1 – $2,000.00 – 1 share or $1,500
- Lien Claimant 2 – $4,000.00 – 2 shares or $3,000
- Lien Claimant 3 – $6,000.00 – 3 shares or $4,500
- Lien Claimant 4 – $2,000.00 – 1 share or $1,500
There is $4,000.00 more owed to lien claimants than owed by owner in retainage.
You handle this by taking a pro-rata share of the $10,000.00.
As you can see, one problem with the retainage funds is that it may not be deep enough to cover all the potential claims. It doesn’t just cover those claims where contractual retainage was held back, it potentially covers everyone who wasn’t paid by the original contractor.
As an example, if the carpet installers or painters at the end of the project weren’t paid for their work, they may seek to recover against the statutory retainage from the owner for the full amount of their work even though they should have been paid in the normal course of business by the original contractor.