California Retainage Overview
Retainage serves two general purposes: (1) To provide an incentive to the contractor or subcontractor to complete the project; and (2) To give the owner some protection against problems like liens, contractual defaults, delays, and more. In most states, laws exist to regulate how the parties use the retainage concept, mostly protecting some parties against abuse of the tool from others. The following are resources, legal information, and frequently asked questions about California’s retainage requirements. The California retainage statutes are reproduced below on this page.
California Retainage for Private Projects FAQs
California Retainage FAQs
In the event of a good faith dispute, the property owner or contractor is allowed to retain 150% of the dispute amount.
All amount of withheld retainage must be released by 45 days from the “date of completion.” If a direct contractor has withheld a retention from one or more subcontractors, the contractor must pay subcontractor’s shares of the payment within 10 days of receiving all or part of a retention payment.
This is not specified in the California retainage statute for private projects.
Concerning disputed work, a direct contractor must give the owner, or a subcontractor must give the direct contractor, notice that work in dispute has been completed in accordance with the contract. The owner or direct contractor shall within 10 days give notice advising the notifying party of the acceptance or rejection of the disputed work. Within 10 days of acceptance, the retention relating to the disputed work must be paid.
Notice must be in writing, which includes printing and typewriting. See above.
California Retainage for Public Projects FAQ
California Retainage FAQs
Prior to completion and acceptance of the project, the amount of retainage may be up to 5%. After 95% of the work is complete, withheld funds may be reduced to at least 125% of the estimated value of the unfinished work. If the work is determined to be complex, the director of the department can require a higher percentage of retainage.
This is not specified in the California retainage statute for public projects.
Securities may be substituted, and a contractor may request that payments be made into an escrow account. In this case, the contractor will receive all interest accrued.
Any claim brought forward concerning a public contract must be arbitrated unless waiver of arbitration is specified in the contract.
An arbitration claim may be initiated no later than 90 days after the date of service in person or by mail.
California Retainage Statutes
Getting informed about prompt payment laws is important. An examination of California’s retainage laws, the rules and regulations related to the amount and timing of allowable retained payments, is important to know your rights and responsibilities as a party on a construction project. California’s specific laws can be found in: Cal. Civ. Code §§ 8812, Cal. Pub. Cont. Code § 10261 and Cal. Pub. Cont. Code § 10263, and are reproduced below. Read on for the California retainage statutes.
Retainage Statute on Private Projects
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.
(b) If part of a work of improvement ultimately will become the property of a public entity, the owner may condition payment of a retention allocable to that part on acceptance of the part by the public entity.
(c) If there is a good faith dispute between the owner and direct contractor as to a retention payment due, the owner may withhold from final payment an amount not in excess of 150 percent of the disputed amount.
Retainage Statute on Public Projects
(a) Payments upon contracts shall be made as the department prescribes upon estimates made and approved by the department, but progress payments shall not be made in excess of 100 percent of the percentage of actual work completed plus a like percentage of the value of material delivered on the ground or stored subject to or under the control of the state, and unused, except as otherwise provided in this section. The department shall withhold not more than 5 percent of the contract price until final completion and acceptance of the project. However, at any time after 95 percent of the work has been completed, the department may reduce the funds withheld to an amount not less than 125 percent of the estimated value of the work yet to be completed, as determined by the department, if the reduction has been approved, in writing, by the surety on the performance bond and by the surety on the payment bond. The Controller shall draw his or her warrants upon estimates so made and approved by the department and the Treasurer shall pay them. The funds may be released by electronic transfer if that procedure is requested by the contractor, in writing, and if the department has, in place at the time of the request, the mechanism for the transfer.
(b) (1) Notwithstanding subdivision (a), when the director of the department has made a finding prior to the bid that a specified project is substantially complex and therefore requires a higher retention amount than 5 percent, and the department includes in the bid documents details explaining the basis for the finding and the actual retention amount, then payments upon contracts by the department shall be made as the department prescribes upon estimates made and approved by the department. However, progress payments shall not be made in excess of 95 percent of the percentage of actual work completed, plus a like percentage of the value of material delivered on the ground or stored, subject to, or under the control of the state, and unused, except as otherwise provided in this section. At any time after 95 percent of the work has been completed, the department may reduce the funds withheld to an amount not less than 125 percent of the estimated value of the work yet to be completed, as determined by the department, if the reduction has been approved, in writing, by the surety on the performance bond and by the surety on the payment bond. The Controller shall draw his or her warrants upon estimates so made and approved by the department and the Treasurer shall pay them with funds appropriated therefor. The funds may be released by electronic transfer if that procedure is requested by the contractor, in writing, and if the department has, in place at the time of the request, the mechanism for the transfer.
(2) Any finding by the director of a department that a project is substantially complex shall include a description of the specific project and why it is a unique project that is not regularly, customarily, or routinely performed by the agency or licensed contractors.
(c) This section shall remain in effect only until January 1, 2018, and as of that date is repealed, unless a later enacted statute, that is enacted before January 1, 2018, deletes or extends that date.
(a)Provisions shall be included in any invitation for bid and in any contract documents to permit the substitution of securities for any moneys withheld by a public agency to ensure performance under a contract. At the request and expense of the contractor, securities equivalent to the amount withheld shall be deposited with the State Treasurer or, a state or federally chartered bank in this state, as the escrow agent, who shall then pay the moneys to the contractor. Upon satisfactory completion of the contract, the securities shall be returned to the contractor.
(b)Alternatively, the contractor may request and the owner shall make payment of retentions earned directly to the escrow agent. The contractor may direct the investment of the payments into securities and the contractor shall receive the interest earned on the investments upon the same terms provided for in this section for securities deposited by the contractor. Upon satisfactory completion of the contract, the contractor shall receive from the escrow agent all securities, interest, and payments received by the escrow agent from the owner, pursuant to the terms of this section.
(c)Alternatively, and subject to the approval and at the sole discretion of the public agency, the payment of retentions earned may be deposited directly with a person licensed under Division 6 (commencing with Section 17000) of the Financial Code as the escrow agent. Upon written request of an escrow agent who has not been approved by the public agency under this subdivision, the public agency shall provide written notice to that escrow agent within 10 business days of receipt of the request indicating the reason or reasons for not approving that escrow agent. An escrow agent that has been disapproved by the public agency may not maintain any cause of action of any nature against the state or any public agency, officer, agent, or employee of any public agency, in connection with the disapproval of that escrow agent. The payments shall be deposited in a trust account with a federally chartered bank or savings association within 24 hours of receipt by the escrow agent. The contractor shall not place any retentions with the escrow agent in excess of the coverage provided to that escrow agent pursuant to subdivision (b) of Section 17314 of the Financial Code. In all respects not inconsistent with this subdivision, the remaining provisions of this section shall apply to escrow agents acting pursuant to this subdivision. In addition, an escrow agent subject to this subdivision shall maintain insurance to cover negligent acts and omissions of the escrow agent in connection with the handling of retentions under this section in an amount not less than one hundred thousand dollars ($100,000) per contract, executed by an admitted insurer and in a form satisfactory to the public agency.
(d)Securities eligible for investment under this section shall include those listed in Section 16430 of the Government Code, bank or savings and loan certificates of deposit, interest-bearing demand deposit accounts, standby letters of credit, or any other security mutually agreed to by the contractor and the public agency.
The contractor shall be the beneficial owner of any securities substituted for moneys withheld and shall receive any interest thereon.
Failure to include the provisions prescribed by this section in bid and contract documents shall void any provisions for performance retentions in a public agency contract.
(e) (1)Any contractor who elects to receive interest on moneys withheld in retention by a public agency shall, at the request of any subcontractor, make that option available to the subcontractor regarding any moneys withheld in retention by the contractor from the subcontractor. If the contractor elects to receive interest on any moneys withheld in retention by a public agency, then the subcontractor shall receive the identical rate of interest received by the contractor on any retention moneys withheld from the subcontractor by the contractor, less any actual pro rata costs associated with administering and calculating that interest. In the event that the interest rate is a fluctuating rate, the rate for the subcontractor shall be determined by calculating the interest rate paid during the time that retentions were withheld from the subcontractor. If the contractor elects to substitute securities in lieu of retention, then, by mutual consent of the contractor and subcontractor, the subcontractor may substitute securities in exchange for the release of moneys held in retention by the contractor.
(2)This subdivision shall apply only to those subcontractors performing more than five percent of the contractor’s total bid.
(3)No contractor shall require any subcontractor to waive any provision of this section.
(f)The Legislature hereby finds and declares that the provisions of this section are of statewide concern and are necessary to encourage full participation by contractors and subcontractors in public contract procedures.
(g)An escrow agreement used pursuant to this section shall be null, void, and unenforceable unless it is substantially similar to the following form:
ESCROW AGREEMENT FOR
This Escrow Agreement is made and entered into by and between
whose address is
For the consideration hereinafter set forth, the owner, contractor, and escrow agent agree as follows:
(1)Pursuant to Section 10263 of the Public Contract Code of the State of California, the contractor has the option to deposit securities with the escrow agent as a substitute for retention earnings required to be withheld by the owner pursuant to the construction contract entered into between the owner and contractor for ____ in the amount of ____ dated ____ (hereafter referred to as the “contract”). Alternatively, on written request of the contractor, the owner shall make payments of the retention earnings directly to the escrow agent. When the contractor deposits the securities as a substitute for the contract earnings, the escrow agent shall notify the owner within 10 days of the deposit. The market value of the securities at the time of the substitution shall be at least equal to the cash amount then required to be withheld as retention under the terms of the contract between the owner and contractor. Securities shall be held in the name of the ____, and shall designate the contractor as the beneficial owner.
(2)The owner shall make progress payments to the contractor for those funds which otherwise would be withheld from progress payments pursuant to the contract provision, provided that the escrow agent holds securities in the form and amount specified above.
(3)When the owner makes payment of retentions earned directly to the escrow agent, the escrow agent shall hold them for the benefit of the contractor until such time as the escrow created under this contract is terminated. The contractor may direct the investment of the payments into securities. All terms and conditions of this agreement and the rights and responsibilities of the parties shall be equally applicable and binding when the owner pays the escrow agent directly.
(4)The contractor shall be responsible for paying all fees for the expenses incurred by the escrow agent in administering the escrow account. These expenses and payment terms shall be determined by the contractor and escrow agent.
(5)The interest earned on the securities or the money market accounts held in escrow and all interest earned on the interest shall be for the sole account of contractor and shall be subject to withdrawal by contractor at any time and from time to time without notice to the owner.
(6)The contractor shall have the right to withdraw all or any part of the principal in the escrow account only by written notice to the escrow agent accompanied by written authorization from the owner to the escrow agent that the owner consents to the withdrawal of the amount sought to be withdrawn by contractor.
(7)The owner shall have a right to draw upon the securities in the event of default by the contractor. Upon seven days’ written notice to the escrow agent from the owner of the default, the escrow agent shall immediately convert the securities to cash and shall distribute the cash as instructed by the owner.
(8)Upon receipt of written notification from the owner certifying that the contract is final and complete, and that the contractor has complied with all requirements and procedures applicable to the contract, the escrow agent shall release to the contractor all securities and interest on deposit less escrow fees and charges of the escrow account. The escrow shall be closed immediately upon disbursement of all moneys and securities on deposit and payments of fees and charges.
(9)The escrow agent shall rely on the written notifications from the owner and the contractor pursuant to Sections (1) to (8), inclusive, of this agreement and the owner and contractor shall hold the escrow agent harmless from the escrow agent’s release, conversion, and disbursement of the securities and interest as set forth above.
(10)The names of the persons who are authorized to give written notice or to receive written notice on behalf of the owner and on behalf of the contractor in connection with the foregoing, and exemplars of their respective signatures are as follows:
On behalf of the owner:
On behalf of the contractor:
On behalf of the escrow agent:
At the time the escrow account is opened, the owner and