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Subcontractors Make Gains on Retainage

Tuesday, June 21, 2011

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Subcontractors in Colorado and Alabama have scored new bipartisan victories in the industry’s growing push to minimize or eliminate the loathed practice of retainage.

The American Subcontractors Association has been leading the charge against retainage and other subcontractor payment policies for years, with changes coming slowly but steadily.  In 2007, New Mexico became the first state to ban retainage on most public and private projects; since then, retainage reform has also notched legislative gains in Kentucky, North Carolina and Tennessee, among other states.

Retainage reform

Retainage is the practice of withholding funds from contractors until a certain date or contingency, such as completion of the job. Primary contractors say that holdbacks give necessary leverage to ensure proper completion of the work; subcontractors say the practice is abused to slow or withhold payments without cause.

Colorado Subs Mark Victory

Colorado Gov. John Hickenlooper, a Democrat, has signed legislation (H.B. 11-1115) that will speed the payment of millions of dollars owed to contractors and subcontractors on state and local government construction projects.

When the law takes effect Aug. 10, public owners will be required to limit retainage to a maximum of 5 percent, instead of 10 percent. That represents up to an extra 5 percent that subcontractors will receive from primes under Colorado’s “prompt pay” statute, which requires prime contractors to pay within seven days “any amounts actually received” from the public owners for the subcontractors’ work.

The new law “begins the process of payment reform” for Colorado construction, said Debra L. Miller, executive director of ASA-Colorado.

However, ASA notes the law also allows public owners to routinely hold retainage on invoices for work completed beyond the midway point of the project.

On the other hand, Colorado legislators earlier passed a law requiring public works contracts to include a clause prohibiting issuance of a change order unless the public owner gives the prime contractor written assurance that lawful appropriations exist to cover the costs of the change order.

Alabama Limits Withholding

On June 9, Alabama Gov. Robert Bentley, a Republican. signed S.B. 437, which limits to 10 percent the amount of retainage contractors can hold from subcontractors on private construction projects. Previously, there was no retainage limit on private construction projects in the state.

The measure, initiated by ASA of Alabama, reduces the rate of retainage held to zero after 50 percent of the project is completed. If a contractor holds excessive retainage on its subcontractors, the contractor must pay interest penalties of 1 percent per month.

The law also establishes a time frame for paying retainage on private projects, requiring the owner to “release and pay retainage” to the contractor within 60 days of completing work as defined by the contract, or within 60 days after “substantial completion” of the project—whichever comes first.

Payment of retainage to subcontractors is subject to the same payment terms. Earlier in the legislative session, legislators passed S.B. 59, which reduces Alabama’s so-called “statute of repose” for architects, engineers and contractors from 13 years to seven years, limiting the time frame in which a person can assert a claim in court over work performed. Both laws take effect Sept. 1.

   

Tagged categories: American Subcontractors Association (ASA); Contractors; Contracts; Laws and litigation; Project Management; Subcontractors

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