Utah retainage laws are designed to offer as much protection as possible to contractors and subs regarding payment. Since retainage is such a common practice, the Utah legislature (along with most other states) stepped in to provide some guidelines and penalties for the abuse of retainage practices. Here’s a breakdown of everything you need to know about retainage on Utah construction projects.
Retainage laws in Utah
Withholding retainage is a highly contentious practice in the construction industry. Its meant to act as protection for owners against defective or incomplete work. On the flip side, retainage is intended to incentivize contractors to stay on the job and finish work so they can collect the remaining contract price owed. But since cash flow is crucial for a contractor or sub to complete a project successfully, there needs to be some regulation to avoid abuses.
Retainage on Utah construction projects is regulated by Utah Code Ann. §13-8-5. Unlike many other states, who have different requirements for public and private projects, the Utah retainage statutes apply to both.
For a deep dive on retainage:
Maximum allowable retainage
Utah has a clear cut limit on the amount of retainage that can be withheld by owners on construction projects. The magic number is 5. This applied to both owners of private projects and the government contracting entity on public projects. Not only can the total retention proceeds not exceed 5% of the total contract price, but only 5% may be withheld from each progress payment as well.
The same rate will apply to every other contract and subcontract on the project only if the retention is less than 5%, or if after the contract is executed the rate is reduced to less than 5% before the project is completed.
The retainage statutes in Utah are explicit in its accounting requirements. Any retainage proceeds withheld by owner s or public agencies must be placed in a separate, interest-bearing account. The interest that accrues will be paid out to the contractor once the project is completed and accepted.
The statute, in turn, requires that all the accrued interest paid to the contractor are distributed proportionately (pro rata) to all of the subcontractors and suppliers.
All the retainage and interest accrued are to be held by the owner or agency in a constructive trust for the benefit of the contractors and subs who earned the proceeds. This places personal liability on them if the misuse or divert the funds for anything else than paying the contractors and subs. These funds are further protected from any transfer, assignment, creditor claims, or garnishments.
This was brought up in our Expert Center not too long ago:
Deadline to release retainage
The statute also imposes specific deadlines governing when retainage proceeds must be passed down. It states that any withheld retainage, and all interest that has accrued, is required to be released by the owner within 45 days of the following dates.
The clock starts ticking for the release of retainage from the latest of one of the following events. (1) The date the owner or agency receives the billing statement from the contractor; (2) the date the certificate of occupancy or final acceptance notice is issued; (3) the date the agency or inspector that has authority to issue a certificate of occupancy doesn’t, but allows partial or complete occupancy; or (4) the date the contractor accepts the final pay quantities.
There is another instance that would trigger the release of retainage, and this gets a little complicated. Its when partial occupancy has been permitted on the project. If this occurs, the retention funds and accrued interest become due in the same 45-day span. But not all of it! The amount released will be calculated as the direct proportion of the value of the part of the project that is being occupied and used.
This is a unique requirement, that may cause more problems than it solves. Yes, it’s helpful that some retention funds are being released; but cue the arguments and disputes over calculating the actual value of the completed portion of the project.
Lastly, once the general contractor receives retainage funds from the owner, they have 10 days to pass retainage payments on to their subs. Who, in turn, also have another 10 days to pay their subs and suppliers.
The problem with the “final acceptance notice “
One of these triggering events is when “final acceptance notice” is issued. The problem is that the statute doesn’t define or describe any conditions that must be present or occur before a final acceptance notice is issued. As always, when the law is silent, it means the parties are free to agree to any contract terms they so desire. Prime contractors working in Utah should be particularly careful about the contractual definition of final acceptance and should try and negotiate fair and reasonable terms.
Owners will clearly attempt to include all sorts of language in their construction contracts that allows them some wiggle room. If the terms are breached, then that triggers the owner’s ability to withhold more than 5% and can hang on to it as long as reasonably necessary to cure the default. This kind of defeats the purpose of the statute a bit, as it could potentially allow the owner to withhold far more retainage for a considerably longer period of time than the legislature intended.
Snell & Wilmer have a great article breaking this problem down further:
Withholding retainage payments
There are two specific scenarios where an owner or contracting agency can withhold retainage payments longer than the allowable time period.
When an owner may withhold retainage longer
The first scenario is when a contractor or sub defaults or breaches any of the terms of the contract. If this occurs, the owner or agency can withhold an amount higher than 5% and hold onto it as long as reasonably necessary to cure the breach or default.
The second scenario is another instance of Utah’s statutes being overly complicated. But stay with me here. This is when the project, or any portion thereof, has reached substantial completion. If work performed by the contractor or sub is not completed according to the contract, or “generally accepted craft standards,” the owner or agency can withhold up to twice the fair market value of the work. This one is particularly dangerous, as depending on the scope of defective work performed, can add up to some serious cash.
If an owner or agency does decide to withhold funds for either of these reasons, they must send notice describing the disputed work to the contractor or sub in writing within 45 days of refusing to pay.
Penalties for improper withholding of retainage
Utah law imposes some fairly strict penalties for improperly withholding or misusing retention funds. Under §13-8-5(10) anyone who knowingly and wrongfully withholds retainage is subject to an additional 2% interest tacked on to the withheld amount including the interest accrued from the retainage account. Furthermore, if the dispute reaches the courts, the successful party will be entitled to attorney’s fees and any other allowable court costs.
Utah’s retainage laws are a bit of a grab bag. Most of the provisions are clear and straightforward, especially considering the fact that the same rules apply to both public and private projects. Unfortunately, there are a few provisions where the requirements get a little dicey; but those are under rare circumstances. Understanding how retainage works in your state is crucial for successfully completing a project. Not only to ensure you get paid the full contract price but to avoid any penalties or liabilities for abusing this practice.
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