An Update and Refresher on Retainage
Construction and Procurement Law News, Q4 2022
Depending on the state, retainage often provides an owner a security interest in unpaid funds to help cover completion costs or other damages that may later occur by withholding a certain portion (typically 5-10%) of contract funds from downstream contractors. Retainage also incentivizes the downstream contractors to timely complete the project so they can get paid what often amounts to their fee for the project. Retainage laws vary widely across the country and on public and private projects and should be analyzed whenever a party (whether owner, contractor, or subcontractor) is looking to engage in contracting in a new state and should be routinely reviewed even if regularly conducting business in a particular state as retainage laws are amended often.
Georgia recently changed its retainage law on all public projects. Ga. Code § 13-10-80 previously allowed owners on public projects to withhold 10% retainage from each progress payment until a project was 50% complete, but none after that so long as the work progress was satisfactory. After Georgia S.B. 438 was signed into law, public works construction contracts entered into on or after July 1, 2022 may now only withhold 5% retainage throughout the entire project. There are also new requirements surrounding retainage release and the amount that can be withheld for punch list work. Georgia’s retainage laws for public projects do not apply to (1) contracts let by the Georgia Department of Transportation for the construction, improvement, or maintenance of roads or highways; or (2) contracts whose value or duration at the time of the award does not exceed $150,000.00 or 45 days in duration remains unchanged. See Ga. Code § 13-10-80(c).
In Alabama, retainage on private projects - similar to what Georgia previously required for public projects - is capped at 10% on the first 50% of the project, and no further retainage may be withheld after 50% completion. Ala. Code. § 8-29-3. An over-retaining party on a private project in Alabama must pay interest on the excess amount withheld at a rate of 1% per month. On public projects, 5% may be retained up to 50% completion, but none after that. Ala. Code § 39-2-12.
In Florida, private projects are not regulated by statute. Florida public projects permit up to 5% retainage for the duration of the project, but this statute does not apply to contracts of $200,000 or less. Fla. Stat. Ann. § 255.078.
In Texas, private owners can withhold up to 10% retainage during the course of the entire project and for 30 days after final completion, which are funds reserved for the benefit of lien claimants. Tex. Prop. Code Ann. § 53.101. Texas public projects under $5 million permit up to 10% retainage, but those over $5 million only permit up to 5% retainage. Tex. Gov’t Code Ann. § 2252.032. And in Tennessee, whether public or private not more than 5% retainage may be withheld. Tenn. Code Ann. § 66-34-103. And if a private owner fails to deposit that retainage into a separate interest-bearing escrow account when the prime contract is $500,000 or greater, that owner can be on the hook for $300 per day for each day the money is not appropriately escrowed. Tenn. Code Ann. § 66-34-104.
In addition, there are provisions in some jurisdictions governing how an owner must hold retainage (as a separate account, for example) and a choice to the contractor to post security for the retainage in lieu of the withholding by the upstream party.
What is clear: retainage laws vary widely across the country and a one-size-fits-all contract would not work in each of the states mentioned above. Owners, contractors, and subcontractors need to be aware of retainage laws in every state they do business in to protect themselves and to know their rights.