Retainage serves an important purpose on construction projects. It ensures that contractors complete the work and sets aside funds for any unpaid subcontractors or suppliers and to remediate incomplete or defective work. But there is potential for abuse. Contractors must negotiate these terms to avoid being the bank on the project. Retainage clauses typically dictate how much is going to be withheld, when the funds will be released, and under what condition.
In Colorado, retainage amounts typically fluctuate between 5-10%. This could be an enormous burden on a subcontractor, especially an early trade such as an excavator or site utility contractor. Owners and general contractors have been content to hold on to those funds through the end of the project. The State of Colorado responded first by passing a law limiting retainage on public projects to 5%. C.R.S. 24-91-103(1)(a). Contractors attempted to negotiate a similar limit on private projects with limited results. Accordingly, the legislature recently passed a law limiting retainage on private commercial projects larger than $150,000 to 5%. C.R.S. 38-46-101. The statute specifically provides that it does not apply to provisions relating to the timing of payment, a condition precedent that work be performed satisfactorily, the right to apply back charges to the retainage, and "pay-if-paid" provisions. There is no similar limit for smaller commercial projects or residential projects with less than five units and, therefore, the parties can negotiate any mutually-acceptable percentage.
Timing of Release.
The retainage provision typically dictates the timing for release of the funds. Contractors should ensure that the funds will be released soon after determination that the work is satisfactory and has been accepted by the owner. Many provisions attempt to time the release based on the owner's release of retainage, which could be the end of the project. For example: "Final payment shall be payable to Subcontractor no later than thirty (30) days after final completion and acceptance of the Project by Owner." "Project," not "scope of work" or "Work," which are usually separately defined. This can be especially problematic for early trades. It could take years for the project to reach full completion.
Retainage provisions often sneak in "pay-if-paid" language, something to the effect of: "Contractor's receipt of Final Payment, including retainage, shall be a condition precedent to any obligation of Contractor or its sureties to pay Subcontractor retainage or Final Payment, and Subcontractor waives all right to commence litigation, arbitration or any other proceeding against Contractor or its sureties for payment until said monies are received by Contractor."
There are a number of reasons why the owner might withhold retainage on the project that have nothing to do with the Subcontractor's work. There is a strong argument that implied in this language is the unwritten caveat "unless nonpayment is caused solely by the negligent acts or omissions of Contractor." For instance, if the owner back charged the general contractor because of defects with the concrete flat work, the general contractor should not be permitted to withhold the excavator's retainage, despite language apparently. The excavator would have a strong argument in this scenario. But it would be wise to include this language to avoid the fight. The only thing worse than having to wait two years for your money is to wait two years just to have a fight about getting your money.