If you are a prime contractor and your subcontract has a warranty retainage provision for subs with no performance bonds, can you legally hold the warranty retinage (say 10%) from the warranty period on a Federal contract, even if you don’t report the witholdings to the Government

8 months ago

we have a lot of Federal contracts and there has always been this cloud around Federal prompt pay and maintaining subcontractor warranty retainage for the warranty period for non-bonded subs.

Disclaimer: The information presented here is not legal advice and should not be construed as such. Rather, this content is provided for informational purposes. Do not act on this information as if it is advice. Further, this post does not create any attorney-client relationship. If you do need legal advice, seek the help of a local attorney.
Senior Legal Associate Levelset
129 reviews

That’s a great question, and Levelset has actually written a helpful article on this topic: Can Contractors Withhold Retainage on Federal Construction Jobs?

As set out in that article, prime contractors are entitled to withhold retainage from their subs on federal construction projects if the contract between the contractor and sub allows for it. However, when a contractor bills the federal government for their subcontractor’s work, the contractor cannot bill for retainage that won’t actually be paid to the subcontractor (yet). So, generally, when retainage is being withheld on a job, contractors are better off not billing the government for amounts that won’t be paid out until it’s time to make those payments. i.e., it’s likely a bad idea for a contractor to bill for the full amount of the sub’s work then hold onto the retained portion, themselves – especially when the government has received no indication that is what’s happening. Otherwise, overbilling problems may arise, and the False Claims Act might even become involved. What’s more, payment must be made to subs on federal projects according to timelines set out under FAR 52.232-27. So, if payment is received that’s supposed to be made to the subcontractor, that payment must be released relatively shortly after it’s billed (except as described below).

Finally, it’s worth noting that there’s a difference between retainage as set out under the contract, and withholding payment due to some issue with the work or noncompliance with the project plans. In instances where payment is being withheld on a situational basis, the government very clearly allows for withholding from a subcontractor as long as proper procedures are followed (including notice to both the subcontractor and the contracting officer of the public entity), subject to FAR 52.232-27(e). But, this process is set out to allow withholding in situations where a contractor discovers that some amount payment is subject to withholding after a payment request is made – not before it. So, if the contractor is withholding payment merely according to the subcontract, rather than as a result of something that happened on the project, it follows that the contractor couldn’t have “discovered” payment would be withheld after the payment request has been received. That means the federal subcontractor withholding procedures (set out by FAR 52.232-27(e)) likely do not apply for planned retainage.

Disclaimer: The information presented here is not legal advice and should not be construed as such. Rather, this content is provided for informational purposes. Do not act on this information as if it is advice. Further, this post does not create any attorney-client relationship. If you do need legal advice, seek the help of a local attorney.
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