Tips to eliminate or negotiate contract retainage clauses
Retainage. The word strikes fear into accounting departments and owners of glass shops everywhere. For the uninitiated, retainages are contract terms allowing a percentage of a job’s value to be withheld until a later point in time. They allow money “earned” to be withheld or delayed. Retainages have a long history, some real patterns of abuse, and are subject to evolving treatment by states, but they are ultimately contract terms that are worth negotiating.
The modern practice of retainage generally came into use when the United Kingdom built its railway network. It was a time when the massive undertaking required for network construction led to less-than-reputable characters entering the bidding. Retainage became a hedge for the railroad companies, who would often hold upwards of 20 percent of a contract’s value to ensure completion. Retainage historically functioned as a more modern performance bond.
The practice of retainage remains today, despite the availability of performance bonds. Owners often have retainage requirements of 5 to 10 percent on general contractors. Those percentages are passed down to the trades as an offset. But while the general contractor’s profit margins may allow owners this float, trades like glazing often operate on margins so thin that the retainage can be multiple times the profit on the job.
The financial burdens retainages impose on trades are often knowingly abused. Delays in return of the retainage or simple non-payment are prevalent. Moreover, using retainage as leverage to secure additional work or to protect against an owner’s dissatisfaction is equally prevalent. More troubling is the withholding of retainage from those who do quality work as a hedge against those who do not—refusing return due to the performance of others.
Many states have legislative controls on retainages in response to these abuses. All 50 states and Washington, D.C., have specific statutes controlling retainage on public works projects. At last count, 24 states have addressed the concept of retainage in private construction contracts, and the legislative process is ongoing. Massachusetts, for example, amended its retainage laws in 2014.
Treatment of private contract retainage in each state is different. Caps on value limit the permissible retention percentage. Timing of repayment clauses requires payment within a specific period after demand. Completion threshold bars forbid retainage after projects are a specific percentage complete. States have enacted some or all of these controls in different measures to limit abuse. There is, however, no industry or legislative standard to address retainage.
That lack of standard treatment means retainage is often negotiated. Glaziers should know a few steps to take and items to look for when retainage appears as a contract term.
First, eliminate the retainage requirement if possible. This is a difficult step. Even so, it is better to have asked for wholesale removal of the retainage requirement than be stuck with one that is, ultimately, a hit on profitability.
Second, if it cannot be eliminated, try an alternative. Many financial options might be an acceptable stand-in for a retainage. Examples include offering substitutes (security offerings in lieu of the owner’s withholding retainage); bonds (performance or surety); or insurance (whole project, performance, or certain policy endorsements may provide an acceptable alternative).
Third, if the retainage must exist, ensure the value is as low as possible. Demand the value not exceed the owner’s retainage demand to the general contractor. This may be difficult because it intrudes into the contracts of others, but there is something fair about the demand.
Fourth, triggers for release should be expressed, tied to well-defined project milestones, and set to payment deadlines. So-called “line item releases” are specific, separately identifiable completion points where a portion or all of a retainage is released. These should be based on milestones that are clear and not easily disputable. Moreover, payment deadlines should be set to avoid long holds beyond the condition itself; for example, 45 days following trigger.
Finally, demand that the retainage be held in an interest-bearing escrow account. The retainage should be held in an escrow account to avoid any inappropriate use for project expenses. The account should also bear interest so the retainage can work (a little) while it is being held hostage.
Retainages are not going away any time soon for public or private projects. As such, keep current on the statutory controls over retainage laws in your state. Use those statutory remedies/limitations where applicable and negotiate contracts to ensure that the money earned becomes money paid.