Withholding portions of payment, also known as retainage, is standard industry practice. Given the amount of abuse that can come with such practices, state legislatures have enacted their own statutes and regulations to control this procedure. Without clear guidelines in place, lenders and owners could easily take advantage of lower-tier subs and suppliers. This article will break down the rules and regulations of the California retainage laws.
Table of Contents
California retainage laws
Retainage is a contentious topic at best. Many see it as an overly burdensome requirement, while others see is as not only providing incentives but adding assurances that the project will be completed. The approach to regulation of retainage on construction projects varies by state to state. Some are silent, and some only regulate public projects. California has statutes that govern both private and public projects, let’s tackle the two most important questions; (1) How much retainage can be withheld? and (2) How long can the retainage be withheld?
For a deep dive on retainage:
In California, retainage on private projects is regulated by Ca. Civ. Code §§8810-8822. These sections cover retainage practices for both payments from the owner to the direct contractor and payments from direct contractors to their subs.
The California retainage laws do not specify any particular amount of retainage that must be withheld on private projects. Parties are free to agree to their own retainage provisions in their contract. If an owner does withhold retention from the direct contractor, they must release the funds within 45 days after completion of the work, as defined by the statute. In turn, once the direct contractor receives retainage from the owner, they must pay their subs the retainage they withheld within 10 days.
California law defines completion of a work of improvement as the occurrence of one of the following events; (1) actual completion, (2) occupation or use by the owner accompanied by cessation of labor, (3) cessation of labor for 60 continuous days, or (4) the recording of a notice of cessation after labor has stopped for 30 continuous days. If any part of the improvement is subject to acceptance by a public entity, then completion is once the work has been accepted.
If there is a good faith dispute between the direct contractor and the sub, the contractor may withhold no more than 150% of the estimated value of the disputed amount. Once the payee (i.e., the sub or prime contractor) feels the work has been completed according to the contract, they must give written notice to the payor (i.e., the prime or the owner). The payor must then accept or reject the disputed work within 10 days. If the work is accepted, then retention related to the work must be paid within 10 days.
If the owner or prime doesn’t pay retainage in accordance with the statute, the statute imposes some penalties. Most notably, the retention funds will accrue interest at 2% for every month the money is wrongfully withheld. Also, if the dispute goes all the way to court, the prevailing party will be awarded costs and reasonable attorney’s fees.
Retainage on public works projects in California are regulated by the Public Contract Code §§7200, et. seq. These statutes allow for some leeway, but there are strict caps on the amount of retainage allowed and payment deadlines.
On public works contracts, the public agency, prime contractors and subs are required to withhold no more than 5% of retainage. The amount that subs may withhold cannot be more than the amount of retainage specified in the original contract between the prime and the public entity. Once the project has reached 95% completion, the retainage may be reduced to 125% of the estimated value of the unfinished work.
One exception to this is when a contractor or sub is required to post a performance and payment bond and either refuses or is unable to. The payor in these situations may withhold more than the retainage rate than the original contract. But the rate still can’t exceed 5%.
One scenario where the rate of retainage can be more than 5% is if, before bidding, the public entity determined that the project is substantially complex. If this is the case, the entity must provide their findings and list out the retention rate in the bid documents. This is a bit dicey, considering there is no definition of “substantially complex,” rather it’s determined on a project-by-project basis.
Payment of retainage funds
The statute requires that within 60 days of the completion of the work, the public entity must release retainage to the prime contractor. The direct contractor then has 7 days from receipt of retainage to pay the subs their retainage. If there is a dispute between the parties, the payor may withhold up to 150% of the disputed amount.
The statute defines completion as one of the following; (1) occupation, use or enjoyment of the improvement, (2) acceptance of the work, (3) cessation of labor for 100 continuous days, or (4) cessation of labor for 30 straight days and a recorded notice of cessation or completion.
Every month that retainage is improperly withheld, interest will accrue at a rate of 2%. Also, if there is a bona fide dispute regarding payment, the payor (i.e., owner/prime) may withhold an amount not to exceed 150% of the estimated value in dispute; same as in private projects.
Wherever you fall on this debate, the fact is that retainage has been standard practice in the construction industry for decades. And it gets the job done! Subcontractors and subs need to be aware of the laws and their rights to retention payments. Particularly since California retainage laws are pretty extensive.