Even as retainage continues to be widely accepted and commonly practiced in the construction industry, the majority of subcontractors interviewed for a 2004 report published by the American Subcontractors Association hold the view that “[prime] contractor abuse of their retainage” is a widespread problem.
Some of the data uncovered by the report are troubling:
- Subcontractors say that they end up receiving less than the full amount of retainage withheld on more than 10% of their projects.
- On normal projects with no major disputes, subs had to wait anywhere from 30 to 900 days after completion to collect the final retainage due to them, with an average wait time was 167 days.
- Asked about the single longest retainage wait they had encountered during their careers, subs reported that the worst cases ranged from a low of 60 days all the way way up to 2500 days (that’s almost 7 years!), with an average wait time of 567 days for each sub’s worst case scenario story.
The Rail Line of Good Intentions
Retainage was invented in the United Kingdom during the 1840s, as the massive undertaking of building out the first country-wide railroad system began. Since there weren’t enough existing contractors in the UK available to handle all of the work, many workers from other industries decided to become contractors overnight, and jumped into the market to take advantage of this huge opportunity. Not surprisingly, many of these new entrants into the construction industry were inexperienced to say the least, and as result, performance issues and project defaults among the newly minted railroad contractors were rampant.
In order to manage the risk, the railroad companies began to withhold as much as 20% of the contractor’s payments, not only to ensure performance, but also as a hedge against the increasingly common occurrence of deficient work that needed to be remediated or redone. And thus, retainage was born.
Retainage Here and Now
Here in the US some 165 years later, the way retainage works on private construction projects in the real world is a significant departure from the original, British practice. Distrust among subs regarding the use – and abuse – of retainage by those higher up in the construction project food chain (but especially with regard to general contractors) is very high.
- There is a widespread belief among subs that prime contractors “often withhold a greater amount of retainage” on them compared to what is withheld by the project owner on the contractor.
- Just about everyone in the industry, including owners, GCs, design professionals and all manner of subs, believes that retainage is used not so much to ensure subcontractor performance, but rather as leverage, forcing the project subs into an inherently weaker financial position should any issues or problems on the project arise.
- And last but not least, just about everyone in the industry also thinks that GCs and owners use their withheld retainage as a free financing mechanism, shifting the borrowing costs of project finance onto the smaller players further down the payment chain.
When trouble with a sub arises…the first question I ask is, “how much money are you holding on the sub?” from the 2013 ENR Risk Summit
Where to Go From Here
As we have written about before, the way that payments work in the construction industry is extremely complex and confusing. As money flows down the payment chain, there are many common practices that, while they may be contractually sanctioned and even accepted by all of the industry players involved, still create a payment ecosystem that is inherently unfair to the participants that can least tolerate it, the smaller subs with limited resources. And even though using the levelset platform won’t negate the use of retainage on a project you might be on, there are several best practices we recommend that might just help:
- Send preliminary notices on every project, even when it’s not required. Proactively sending preliminary notices not only helps to secure your lien rights, it helps to promote an overall acceptance of communication and transparency on your projects, something that your project partners will appreciate.
- Know what lien waivers are and how they work and use them on your projects. If you’re not sure where to start with lien waivers, we have plenty of information and resources available to help.
- Familiarize yourself with Mechanics Liens. Find out how proactively managing your lien rights can help to get you paid.