Retainage. Just the mere mention of the word makes most in the construction industry cringe. But retainage can also be thought of as the necessary evil of construction projects. Retainage is the withholding of a portion of each progress payment earned until a construction project is complete. Why? Incentive!
Before getting too far along, it should be noted that the industry has mixed feelings regarding retainage. Some contractors feel they couldn’t go without it, other industry members think the practice needs significant reform. Regardless of where you land on the spectrum, it’s important to know the rules surrounding retainage.
Can contractors withhold retainage on Federal jobs?
The rationale behind retainage is that it ensures the completion of the overall project/contract. It’s true – retainage has its benefits. Withholding retainage gives the contractor a financial incentive to complete the project successfully. It also provides the owner with some immediately available funds in case of default or unforeseen issues during the project. On the other hand, retainage can be viewed as a serious problem in the construction industry, and sometimes can result in many project participants not receiving full payments for properly performed work.
As stated in one of our previous posts, “Retainage gets the job done!”
They sure can
Under the Federal Acquisition Regulation (FAR), a prime contractor may withhold payments from their sub pursuant to the contract between the parties. So, if the contract between them provides for retainage, they are allowed to do so under the terms set forth, even if the government is not withholding retainage from the prime.
There’s a very important note to make here though: If the prime is withholding retainage, they cannot bill the government for the retainage. This basically results in the government holding the retainage.
What about retainage between the public entity and the contractor?
Regarding retainage withheld from the contractor by the government contracting authority: The federal government’s policy on retainage states that funds shall not be retained “without cause,” and should be determined on a “case-by-case” basis. The legal translation of that is, the Contracting Officer has complete discretion to decide whether or not to withhold retainage based on their assessment of past performance and likelihood of continuing performance.
According to the FAR, if “satisfactory progress has not been made, the Contracting Officer may retain a maximum of 10% of the amount of the payment until satisfactory progress is achieved.” However, in practice, it is usually between 5-10% with a gradual reduction once certain milestones are reached.