Can Retainage Be Held Until Final Completion Of The Project?

On public projects, an owner typically withholds retainage of 10%. Can the owner hold this 10% retainage until final completion? The short answer is, No!

Section 3921 of the PA Procurement Code mandates that, when the contract is 50% completed, retainage “shall not exceed 5% of the value of completed work” and can then be withheld only until substantial completion. The only condition is that the contractor must be making “satisfactory progress,” and there must be no cause for a “greater withholding.” Read more

Posted on February 6, 2018 by Christopher I. McCabe, Esq. in Procurement Code, Retainage Comments Off

Retainage Revisited: For How Long Can A Public Owner Withhold Retainage?

Retainage is always sore point for contractors, especially where an owner holds retainage for seemingly no good reason. On public works projects, for how long can retainage be withheld? More and more, I am seeing public contracts in Pennsylvania where the public owner – oftentimes townships or local authorities or school districts – will grant itself the right to withhold retainage of 5% and sometimes even 10% until the project is finally completed, including until after the completion of all punch list items. These contracts are often drafted by the hired architects or engineers who are woefully ignorant, sometimes intentionally, of the legal requirements applicable to public works contracts in Pennsylvania.

Can a public owner in Pennsylvania really hold retainage till the last nail is hammered? The short answer is no! The Commonwealth Procurement Code sets forth specific legal requirements for the withholding of retainage on public works contracts in Pennsylvania: 10% until the project is 50% complete, then 5% thereafter. When must the 5% retainage be released? At substantial completion, not final completion.

On this point, section 3941 of the Procurement Code provides:

§ 3941. Substantial/final payment under contract.

(a) Contract containing provision for retainage.–A contract containing a provision for retainage as provided in section 3921 (relating to retainage) shall contain a provision requiring the architect or engineer to make final inspection within 30 days of receipt of the request of the contractor for final inspection and application for final payment. If the work is substantially completed, the architect or engineer shall issue a certificate of completion and a final certificate for payment, and the government agency shall make payment in full within 45 days except as provided in section 3921, less only one and one-half times the amount required to complete any then-remaining uncompleted minor items, which amount shall be certified by the architect or engineer and, upon receipt by the government agency of any guarantee bonds which may be required, in accordance with the contract, to insure proper workmanship for a designated period of time. The certificate given by the architect or engineer shall list in detail each uncompleted item and a reasonable cost of completion. Final payment of any amount withheld for the completion of the minor items shall be paid upon completion of the items in the certificate of the engineer or architect.

This statutory provision is mandatory, is the express public policy of Pennsylvania, and cannot be altered by a take-it-or-leave-it agreement. Of course, this means that the contractor must still demand final inspection and apply for final payment before it can demand release of the retainage. If it does this, the burden then shifts to the public owner to carry out its statutory obligation, and the contractor should then be entitled to release of all retainage, except for the certified punch list amount.

So, if your project is substantially completed, you should request final inspection and final payment. If you are still owed retainage, except for the punch list, demand release of the retainage. If the public entity holds onto the retainage after it should be released, you are entitled to collect 10% interest on the withheld amount. If you don’t enforce your rights to retainage, you can be certain that the engineer overseeing the public project won’t either.

An earlier post on retainage can be found here.

Posted on September 3, 2013 by Christopher I. McCabe, Esq. in Retainage Comments Off

Public Contracting 101: Retainage

This post is the first in a series on the basic concepts and tenets of public contracting in Pennsylvania.

Public works contracts in Pennsylvania may include a provision for the withholding of retainage. Retainage is a sum of money which is withheld from payment until the contract is completed.

However, under the Pa. Procurement Code chapter applicable to public works contracts, the retainage cannot exceed 10% of the amount due the contractor. When the contract is 50% completed, one-half of the amount retained by the government agency must be returned to the contractor, provided that the architect or engineer approves payment, and provided that the contractor is making satisfactory progress, and there is no other reason for holding more retainage, such as a backcharge claim. After the contract is 50% completed, the retainage cannot exceed 5% of the value of the completed work.

For multiple-prime projects, the government agency can hold additional amounts as retainage, equal to one and a half times the amount of any possible liability, where there is a dispute between the prime and the government agency based on increased costs claimed by one prime caused by the delay of another prime . This additional retainage can be withheld until such time as a final resolution is agreed to by all parties directly or indirectly involved unless the prime causing the additional claim furnishes a bond satisfactory to the government agency to indemnify the agency against the claim.

Retainage may be withheld from the contractor only until substantial completion of the contract.

If the government agency refuses to follow the foregoing rules, it may be liable to the contractor for interest and penalties on the wrongfully withheld amount. Furthermore, while government agencies often attempt to impose varying retainage provisions and requirements in their forms of contracts (typically AIA forms), such provisions are likely unenforceable as they contradict the statutory provisions of the Procurement Code.

Unless there is sufficient reason, a contractor must pay all of its subcontractors their earned share of the retainage the contractor received within 20 days of the receipt by the contractor.

The Pennsylvania statute on retainage (62 Pa.C.S. §3921) can be found here.