Understanding Retainage - And its Alternatives
Construction contracts include retainage as an amount of money withheld by the property owner or general contractor until the project is substantially complete. In some situations this provides a useful incentive to get a contractor to complete a project in a timely fashion. However, holding a retainage payment further complicates accounting and places cash flow pressure on businesses and laborers. Since retainage clauses put contractors at the whim of those who pay them, it's important to know how retainage works and what alternatives are available.
New Retainage Legislation
Retainage is a form of protection that allows owners to withhold a certain amount - often 10% - to ensure completion of projects. The specific amount allowed differs by state. Many states have recently developed new legislation to regulate the amount an owner can withhold. The new legislation also controls the date when funds must be disbursed.
Generally, when a contract is 50% completed, the owner is required to pay 50% of the amount retained. The remainder of the retainage payments are generally due when work on a project is "substantially complete." This means that the owner can use the structure for its intended purpose, even if there is more work to be done before it is finished. Again, the specific timing and amount of payments differs by state and sometimes by contract.
If a prime contractor is subject to a retainage clause, they often pass down to subcontractors in contract the right to withhold a portion of their payment. This can cause a particularly large problem when the subcontractor completes their portion of the work early in the project but cannot collect their retainage until much later.
To check your state's retainage law with one of our experts please
Alternatives
There are alternatives to retainage agreements that can accomplish the same goals. If you're faced with a retainage provision in a contract you are not comfortable with, these are alternate solutions you can suggest. General contractors, in particular, are well-placed to suggest modifications to a construction agreement that will not only protect them, they will also protect everyone who will be working underneath them.
Performance Bonds
Just as a construction firm would get a bond to ensure performance on a government project, one alternative to retainage in private contracts is to take out a performance bond. This means a third party will guarantee the work is completed to specification and will step in if it isn't.
Trust Accounts
Money being withheld until performance is complete can be invested into a trust account. This way, instead of having the funds sit idly in escrow or earning interest for someone else, the trustee can invest the funds for the eventual benefit of the contractor.
Additional Security
In some situations, a contractor can put up a bank note or other marketable security as a guarantee of their performance on a contract. This would allow them immediate access to all funds owed, but place them at risk if the project is not completed as specified.
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