Many states, like California, manage the amount of retainage withheld on public projects. In California, no more than 5% of the contract price may be withheld. Also, the normal practice is that after 50% of the project has been completed, no more retainage will be withheld. Therefore, public owners will calculate how much retainage needs to be taken out of each progress payment before the midway point is reached to equal 5% of the contract price. Typical of most prompt pay laws, once funds are released to one tier, that contractor has a specified amount of time to release the fund further down the chain. Recently, a California court answered the question, “[w]as the decision by the owner to stop withholding future retentions and pay full progress payments to the contractor equivalent to a payment by the owner of past retentions under section 7107?”
Retained Not Released
In Blois Construction, Inc. v. FCI/Fluor/Parsons, 2016 Cal. App. LEXIS 215 (Mar. 23, 2016), the California Appellate Court heard a claim from a subcontractor arguing that the general contractor on a public project violated the Prompt Payment Statute. The subcontractor claimed that, at the midway point of the project, the public owner began to make full payments without withholding any amount from each payment. This claim was not disputed. The question that arose was did this qualify as a payment of past retentions? The subcontractor argued that it did, and therefore, the general contractor has violated Prompt Payment Laws by not distributing the retention payments in a timely manner. The specific provision the subcontractor was referring to was section 7107(d) which states
(d) Subject to subdivision (e), within seven days from the time that all or any portion of the retention proceeds are received by the original contractor, the original contractor shall pay each of its subcontractors from whom retention has been withheld, each subcontractor’s share of the retention received. However, if a retention payment received by the original contractor is specifically designated for a particular subcontractor, payment of the retention shall be made to the designated subcontractor, if the payment is consistent with the terms of the subcontract.
The court wholeheartedly disagreed with the subcontractor. The court’s decision was rather simple:
Blois’s [subcontractor] argument fails because when Expo [public owner] ceased withholding retention funds in 2010, it was not paying funds previously withheld. Rather, in its progress payments, it paid FFP the total amount then due without withholding a retention. Because no funds were withheld or paid as retentions, section 7107 did not apply to these payments.
The final judgment was essentially that the subcontractor misinterpreted timely progress payments for untimely paid retention payments.
Understand When Retainage is Released
This decision highlights something very important: understanding the laws of the land. When you read the retainage and prompt payment statutes of California, it becomes very apparent that the challenges presented by the subcontractor were ludicrous. The statutes can be confusing because there is a lot of percentages thrown around. Five percent of the total contract is allowed to be withheld. The amount withheld per progress payment and for how long is determined by the contract terms. Once five percent of the total contract price has been withheld, no matter at which point of the project, no more funds may be withheld. This court makes it very clear though that once payments switch to full progress payments, the retained funds are NOT considered released. This decision greatly affects when prompt payment laws start to kick in.