Recent Statutory Changes Cap Retainage on Applicable Construction Projects

Recent reforms to certain state retainage laws have reduced the lawful amount of withholding permitted on construction projects. In theory, retainage allows an owner to mitigate the risk of incomplete or defective work by withholding a certain portion of payment until the construction project is substantially complete. Recent statutory developments in Washington, New York, and Georgia represent significant changes in how much an owner may retain on applicable construction projects in those jurisdictions. The details of each state’s retainage laws vary in many important respects. Most states set caps at 5% or 10%, with important variations depending on the type of project and the amount of progress completed. Some states require retainage to be held in an escrow account, but most do not. Many federal construction projects allow up to 10% retainage, while other federal agencies do not require any retention. See 48 CFR § 52.232-5(e) - Payments Under Fixed-Price Construction Contracts.

The ongoing motivation for retainage reform is typically framed in terms of reducing delays in getting payment to subcontractors who complete their scope of work on time and free from defects. 

Washington

Washington State enacted Senate Bill 5528 to reduce retainage on private projects to 5% of the contract price of the work completed. See RCW 60.30.010. Effective July 23, 2023, the new law now reflects Washington’s pre-existing 5% cap on public projects. Under the new law, an owner has 15 days after notice of completion of work to notify the contractor of additional work required for completion of the project. After 30 days, unpaid amounts begin to accrue a 1% per month penalty per violation. In lieu of retainage, SB 5528 contains a provision which allows contractors and subcontractors to tender a retainage bond to the owner or upstream contractor.  

The Washington law does not apply to single-family residential construction of less than 12 units. Notably, waiver of the new statutory cap is not prohibited. The new law does not appear to contain language implying the possibility of retroactivity.

New York

On November 17, 2023, Governor Kathy Hochul signed legislation making important changes to New York’s Prompt Payment Act (N.Y. Gen. Bus. Law §756). Much like Washington, the New York legislation caps retainage on private construction projects at 5%. The changes apply to all private construction projects in New York with a contract sum over $150,000. Under the new law, New York contractors can submit an invoice for the full amount of retainage after achieving substantial completion.

Before the amendments, N.Y. Gen. Bus. Law §756 allowed an owner to retain “a reasonable amount” of retainage. There is a 1% per month penalty for violations.

Georgia

In 2022, the Georgia General Assembly passed Act 781 amending O.C.G.A. §§ 13-10-80 and 13-10-81. The relevant retainage reforms apply to most public works projects in Georgia not including roads or highways. The main feature of Act 781 is capping retainage on applicable public projects at 5% of each progress statement. The statute also contains language which allows the owner of a public works project to withhold 200% of the value of any outstanding punch list work remaining after substantial completion. These and other changes went into effect on July 1, 2022, and are not retroactive.

How did Retainage Become Popular?

Retainage appears to have developed as a construction industry custom at least as early as the beginning days of the 19^th century. For example, during England’s 1840s railway boom, railroad companies began to withhold up to 20% of contract sums to mitigate the risk of inconsistent and under-skilled labor. Today some type of retainage is a common industry practice in many, but not all, domestic and international jurisdictions.  

Conclusion

Understanding the current retainage laws in a client’s jurisdiction is critical to help prevent disputes before they begin. Because important details of these laws vary widely from state to state, it may be helpful to review the applicable retainage and prompt payment laws during the pre-bid and contract-drafting process.

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Patrick McKnight is a member of Fox Rothschild’s national Construction Practice Group. For more information, please contact Patrick at pmcknight@foxrothschild.com. 

This article is provided for informational purposes only—it does not constitute legal advice. Readers should consult legal counsel before taking action relating to the subject matter of this article.