Florida retainage laws are drafted to be as fair as possible to all parties involved. Retainage is relatively unregulated on private projects, although some prompt payment statutes apply. Public projects, on the other hand, have caps on the amount and certain time periods in which retention funds must be released.
Retainage
Retainage is a controversial topic at best. In theory, this provides an incentive to subs to finish the work properly and on time. For owners and GC’s, this provides insurance funds in case a subcontractor fails to perform. But cash flow is crucial to a successful project, which is why state legislators have attempted to regulate these practices best they can.
For a deep dive on retainage:
Private project retainage
The state of Florida doesn’t provide a statute regulating retainage on private construction projects. The law is silent in regards to the amount of retainage that needs to be withheld on private projects. Therefore, retainage on such projects will be governed by the contract terms between the parties.
Timing of retainage payments
Retainage on private projects is closely tied to the Florida Prompt Payment Act. The retainage section of the prompt payment act states, that on private projects retainage funds must be paid out within 14 days of one of the following events:
- A certificate of substantial completion is issued;
- The building inspector issues a certificate of occupancy; or
- The owner or tenant of the owner takes possession of the property.
When one of these three events occurs, the owner must then provide the contractor with a punch list. The punch list should be provided within either the time frame set out in the construction contract or within 15 days of one of the above-mentioned events. Any payments withheld longer will be subject to the applicable prompt pay interest rates.
Making a lien claim for retainage on private projects
The biggest problem with retainage is how long it takes to secure is the timing issue. So much so that the issue was recently brought up in our Ask an Expert Center: How do we file a lien on retainage amount if liens can only be filed 90 days after the last day on a job???
Timing issue
Here’s the problem for subcontractors and suppliers. Retainage in Florida becomes due only after completion of the project as a whole, not the completion of the subcontract. Meaning, if a sub finishes their scope of work at an early stage in the project, they could be waiting months or longer to get be able to collect retention funds.
To make matters worse, a mechanics lien claim must be recorded within 90 days of the last furnishing of labor or materials; and subsequently foreclosed on within 1 year of recording the claim. At this point, the project might still be ongoing, and a foreclosure action can only be initiated for unpaid money that is due. Since the project may still be going, the retainage hasn’t become due. Any attempt to foreclose on payments that haven’t become due yet, could render it a fraudulent lien claim.
Best practices
So what to do? This stresses the importance of negotiating contract terms early on. Especially if you are working on early phase items like foundational or framing work. Most general contractors will refuse to eliminate retainage altogether, so it’s important to push to include some sort of timing provision in the contract concerning retainage.
The language should tie payment of retainage to the date of the last furnishing. This should give the contractor adequate time to collect retention funds from the owner, but state that the retainage should be paid in less than a year from the last furnishing. This will allow enough time for a foreclosure action within the deadline period.
Public project retainage
Florida law does have extensive legislation concerning retainage on public works projects. The main statute regulating public retainage is found in Florida Statute §255.078.
Note: In 2020, Florida amended its statutes governing retainage on public works projects, and these new rules apply to all projects entered into after October 1, 2020. So this article will discuss the requirements for projects entered into prior to and after these changes
Projects entered into prior to October 1, 2020
Rate of retainage
Public entities may withhold retainage from progress payments on public works projects in Florida; the amount is capped at 10%. The contracting entity does have the discretion to withhold less or have the rate of retainage reduced as the project progresses, but it cannot withhold more than 10% of the contract amount. These rules change however once the project reaches 50% completion.
Importance of the halfway point
When the project reaches 50% completion, it triggers two important aspects of the public retainage statute. Determining what constitutes 50% completion depends on the contract itself defines what 50% completion is.
If there is no contractual definition, then it will be when 50% of the total cost of construction services has been paid by the agency; including any existing change orders or modifications. These rules do not apply to contracts under $200,000.
• Reduced retainage
Once the project reaches the 50% completion mark, the public entity must reduce the rate to no more than 5%. As far as retainage withheld by prime contractors, the same halfway mark reduction applies. But, the contractor can elect to withhold more than 5% from a particular sub.
This should be evaluated on a case-by-case basis, and the decision should be based on the subcontractor’s past performance, the likelihood such performance will continue, and whether the contractor can rely on other safeguards; like a bond. To do so, the contractor must notify the subcontractor in writing, stating the amount of retainage to be withheld, and the reasons the determination to withhold more was made.
• Release of half of the retainage funds
The 50% completion mark is also significant for another reason. The statute provides an opportunity to receive some retained funds. Once the project has reached this point, a contractor may make a payment request for one-half of the retainage. The date that the rest of the retainage will be released depends on the contract price.
Payment of retainage
The general rule is that Florida retainage, along with final payment, must be paid within 30 days of substantial completion. However, on projects that are estimated to be over $10M, the contract terms may extend this period no longer than 60 days. Substantial completion should be defined by the contract terms. If not, then it will be when the public entity has assumed beneficial use or occupancy of the improvement.
Once a contract receives retention funds from the public entity, the contractor should, in turn, pay their subs and suppliers within 10 days of receipt of the funds. If there is a good faith dispute regarding performance, the public entity may withhold up to 150% of the total cost to complete such work. Any funds that are improperly withheld will be subject to an interest rate of 1% per month.
Projects entered into after October 1, 2020
Under the new retainage laws for public projects in Florida, most of the confusion is gone. Rather, the retainage provisions are fairly straightforward. State and municipal projects entered into after 10/1/20, can withhold no more than 5% of each progress payment; period. The changes also removed the mandatory reduction in retainage at the 50% completion mark, as well as the ability to request the early release of retainage. The release of retainage within 30 days of substantial completion, however, remains intact.
See: New Florida Retainage Laws Start October 1, 2020
Making a bond claim on retainage
According to Fla. Stat. §255.05, a bond claim for recovery of retainage against needs to be instituted against the contractor or surety within 1 year after the last day of furnishing of labor or materials. That seems straightforward. But rarely are things this simple. An action can’t be initiated until one of the following events occurs:
- The entity has paid the claimant’s retainage to the contractor and the statutory time for payment has passed;
- The claimant has completed their work and 70 days have passed since the contractor sent a request for final payment;
- 160 days after substantial completion of the project; or
- The contractor hasn’t responded in writing within 10 days after receipt of a request for information.
This written request should pose the following three questions; (1) has the project reached substantial completion?, (2) has the contractor been paid the claimant’s retainage?, and (3) has the contractor sent the final payment request?
If the claimant is not able to start an action within the 1 year period because none of these events have occurred, all is not lost. The statute provides an extension of 120 days after one of the events finally occurs.
Bottom line
Depending on the size of the construction contract, Florida retainage can add up quickly. Contractors and subs should be aware of their right to be able to ensure that retention funds are properly withheld and are paid out in a timely fashion.
Filing a bond or lien claim on retention can be tricky. Be sure to read your contract carefully and negotiate fair and reasonable retainage terms; particularly on private projects.
Additional resources
- Florida Prompt Payment Act: What Contractors Need to Know
- Florida “Pay-if-Paid” & “Pay-when-Paid” Clauses
