Considerations for Negotiations of Retainage in Construction Contracts

Retainage in construction projects is the concept of the owner withholding a certain percentage of the payment earned by the contractor. It is used to incentivize contractors to satisfactorily complete all work under the construction contract.

Under Florida law, the maximum retainage withheld in progress payments for public sector projects is capped at five percent, but there is no cap on the percentage of retainage for private sector projects. The industry standard percentage of retainage withheld from each progress payment is typically ten percent for private construction projects.

In negotiations for retainage rates and terms, contractors will typically seek to have such items as their fee, general conditions, insurance and bond costs, material purchases and storage, and permit fees excluded from any retainage payment withholdings. Withholding retainage on such items is often argued by contractors to present unfair requirements that force them to finance the construction costs.

New trends have developed for contractors to request that owners release fifty percent of the retainage halfway through the project and reduce the retainage on all remaining payments at that point to five percent.

Another recent trend is for contractors to request the release of retainage for subcontractors who satisfactorily complete their scope of work during the course of a construction project. This enables subcontractors to be paid in full upon the satisfactory completion of their work and prevents recording claims of lien. Typical early-release subcontractors may include those responsible for demolition, shell, roofing, drywall, and stucco.

For all other payments, retainage is released either at substantial or final completion of the work. However, owners will usually hold back 150% of the reasonable costs to complete any punch list items.

Retainage funds are not usually required to be held in separate escrow accounts in Florida, unless such stipulations are agreed upon by the parties, and the standard American Institute of Architects agreements include provisions addressing retainage requirements. By working with highly qualified and experienced construction attorneys, property owners and general contractors can negotiate and execute effective retainage terms and conditions.