Retainage is required on almost all construction projects. Retainage in a construction contract allows the developer to withhold a portion of each progress payment to the contractor until the project is complete. Retainage is basically a form of insurance to the developer because there is a strong financial incentive for the contractor to complete the work even though it is only a small percentage withheld from each payment.
Retainage for public construction projects is often governed by local laws.
For example say a new Maryland government building needs to be constructed. A general contractor earns $5,000 upon pouring the foundation, plus $15,000 upon completion of the frame, plus $10,000 upon completion of the roof. Of each payment, normally 10% is held back by the developer as retainage. In Maryland, the retainage is paid when the project is completed.
A Maryland law decreased the required retainage from 10% to 5% on public construction projects, but requires the contractor to furnish payment and performance bonds. The American Subcontractors Association (ASA) of Baltimore fought for the passing of this bill.
The ASA recognizes that retainage is important in construction law and construction contracts. However, some contractors often have to wait years for final payment because retainage is not paid until the project is done. Contractors and subcontractors who finish projects in a timely manner and “early finishing trades” like excavators and site work contractors have been hurt by higher retainage percentages. This law provides a great financial benefit to constructors of all public buildings in Maryland because it will increase the necessary cash flow to permit on-going operations.
For more information on retainage language in construction contracts and the effect of this new amendment please contact Michael Siri at Bowie and Jensen, LLC.