Withholding retainage on construction projects is commonplace. Given the inherent risk of abuse, states have enacted various laws to oversee this practice as best they can. Pennsylvania retainage is regulated on both public and private projects, yet the laws concerning public projects are much more extensive. Let’s take a look at the limits and timing for the release of retainage in Pennsylvania.
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Pennsylvania retainage laws
Retainage is always a sore subject in the construction industry. Theoretically, retainage provides an incentive to contractors and subs to finish the work properly and on time. For owners, this provides insurance funds in case a contractor 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.
There are Pennsylvania retainage laws that cover both public and private projects. Public projects have their own statutes that govern retainage practices. As for private projects, the provisions regulating retainage are found within the Contractor and Subcontractor Payment Act (CASPA).
Public project retainage
The Pennsylvania retainage laws for public projects are codified in PA. Const. Stat. §§3921, and 3922. These provisions cover all construction contracts with a state, local, or municipal government entity.
Amount to be withheld
The maximum amount of retainage that can be withheld on public works projects is 10% of the contract price. However, this can change once the contractor has reached the 50% completion mark on the contract. If the contractor has been making satisfactory progress, and there’s no specific cause to withhold more, this rate can be reduced to no more than 5% of each remaining progress payment. In addition to this, the contractor is also entitled to one half (1/2) of the amount that has already been retained by the government agency.
There are two types of government contracts that the statute provides different rates for. If the contract is from the Department of General Services, the maximum amount is capped at 6% for each progress payment. Once the 50% completion mark is reached, the retainage is limited to no more than 3%. The other type of contract that has a different retainage rate is for highway contracts. Their maximum allowable retainage is 5%, and one the contract is half completed; the public entity can’t withhold any more retainage.
Release of retainage payments
As we stated in the previous section, once the contract has been successfully reached the halfway point, half of the retainage that has been withheld can be released to the prime contractor. As for the release of retainage at the end of the project, it must first be approved by the architect or engineer on the project. After they receive the final request for payment, they are required to conduct their final inspection within 30 days.
If it is determined that the work is substantially complete, then the agency is required to release final payment, along with retainage within 45 days of final acceptance. However, it’s determined that the work is still incomplete, then the agency is allowed to withhold 1.5 times the amount of the unfinished work until it is completed. Once the prime contractor has received retainage payments, they have 20 days of receipt to pass on the proportionate amount retained to their subs and suppliers.
Late payment penalties
If the contract provides for retainage, and the final payment has been wrongfully withheld, some penalties will kick in. For each day past the 45-day deadline, interest will accrue at a rate of 10% a year, which comes out to a little less than 1% a month.
Also, if during arbitration or litigation, it’s found that the paying party withheld payments in bad faith, an additional 1% interest per month will be imposed. In Pennsylvania, the courts have defined what bad faith means in this context. It is the withholding of payments without any legal or factual basis. If this is the case, then not only will the payments accrue extra interest, but the prevailing party will be awarded reasonable attorney fees as well.
Private project retainage
As indicated above, Pennsylvania retainage practices on private projects are regulated under 73 Pa. C.S. §509 under the Contractor and Subcontractor Payment Act. This is PA’s version of a prompt payment act. These regulations are much more lenient than their public counterpart.
Amount withheld & timing of payments
There is no limit to the amount of retainage that can be withheld on a private project. However, the typical amount of retainage withheld on most projects range around 5-10%. An important thing to note is that even if the owner isn’t withholding retainage from the general contractor, they may still withhold retainage from their sub according to their contract terms.
Once the project has reached completion, the owner must release final payment and retainage within 30 days of acceptance. After the general contractor received retainage payments, they shall, in turn, pay retainage to their subs within 14 days.
Contactors do have an option to receive retainage payments earlier. If the project reaches substantial completion, the contractor (or sub) can post a maintenance bond for 120% of the amount of retainage withheld.
Late payment of retainage
If an owner, contractor, or subcontractor unreasonably withholds retainage for longer than the statutory deadline, the amount will be subject to the accrual of 1% interest a month until the payments are released. In addition to interest penalties if the dispute goes to court or arbitration. The prevailing party will be awarded reasonable attorney’s fees as well.
Depending on the size and duration of the project, retainage can add up quickly. And, unfortunately, it’s usually included in almost every construction contract. This can be a serious challenge for lower-tier project participants that float costs and extend credit for a majority of the project. It’s important to know the regulations governing Pennsylvania retainage, to ensure that you get paid what you’ve earned.