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Retainage question

6 days ago

CA retainage question

On your levelset website it says: “Retainage withheld from a direct contractor must be released by 45 days from the “date of completion.” Amounts withheld by the direct contractor from a subcontractor or supplier must be released within 10 days of the contractor’s receipt of any retention payment.”

When we bill a job, when its complete we bill 90% of the contract amount with a 60 day payment period. We usually bill the retention about 30 days later.
According to the statement above we should bill the retention at the same time but then expect payment of that to be made within 45 days? (in less time than the final bill?) That does not make sense…

Senior Legal Associate Levelset

California’s retainage rules for private projects are set out by § 8810 – 8822 of the California Civil Code. Let’s first look at the rules, then discuss practical implications.

Under § 8812(a), “If an owner withholds a retention from a direct contractor, the owner shall, within 45 days after completion of the work of improvement, pay the retention to the contractor.” However, under § 8812(c), an owner can continue to withhold retainage if there’s a good faith dispute between the owner and the contractor over retention payments. In that case, up to 150% of the disputed amount can be withheld. And, under § 8818, failure to make timely payments, as required, will invoke an interest penalty of 2% per month. Finally, under § 8820, it’s against public policy (not legal) to waive the retainage provisions created by § 8810 – 8822.

With the above in mind – retainage rules will apply regardless of what contract terms are in place (unless retainage is being held by a lender pursuant to a construction loan agreement). Meaning, even when the retainage rules might not make sense with the terms of the contract, they apply.

Practically speaking, though – a contractor doesn’t have to enforce their retainage rights. If the contractor is perfectly happy getting paid beyond the 45 day mark, that contractor is free to wait on payment without asserting their right to retainage penalties. However, note that a contractor will still be required to pay their subcontractors and/or suppliers on time (if there are any on the project). And, when sub tiers have to unfairly wait for payment, that’s when payment disputes start brewing. Generally, intentionally contributing to the industry’s slow payment epidemic might not be a great idea. Though, floating any payments down the chain while waiting for retainage would certainly be an option.

Understandably, if there are subs and suppliers on the job, they might not be so patient – especially considering the dramatic effect slow payments have on cash flow. And, when these parties get in a cash flow bind due to their contractor or the owner ignoring payment timing requirements, they’re generally entitled to make claims like a mechanics lien, stop notice, prompt payment claim, or retainage claim.

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