The Dinosaur in the Room: Time to Make Retainage Extinct
By Courtney Little
Glazing subcontractors are in the business of building construction and should not be required to finance construction projects in whole or in part. Yet, to the extent that funds are being retained, the subcontractor is often providing a portion of the project financing.
The American Subcontractors Association (ASA) believes it’s long past time for subcontractors to get out of the banking business. I think we all agree that retainage is one of the industry’s most antiquated systems.
Here’s five reasons to get support from legislators and public officials to eliminate unnecessary retainage and four ideas for reforming the system.
1. Retainage deters capable construction firms from bidding on contracts. It ties up valuable working capital and in some instances, forces them to borrow money to meet expenses. Eliminating unnecessary retainage could increase fair competition by involving more companies in the bidding process.
2. Retainage increases bid prices. When a contractor has to use its own equity to absorb retainage costs, it must recover these funds somewhere. Many contractors increase their bid prices to reflect the cost of capital, including interest on the money they have to borrow.
3. Retainage held until the completion of a project can tie up a company’s capital for months or years. Some projects can take many years to complete, yet retainage sometimes is held until final acceptance or longer. Full payment is important to the cash flow of any well-run business. Contractors simply do not have sufficient working capital to fund the loss of cash flow due to retainage, nor do they have the capacity to borrow such large amounts.
4. The warranty under the contract provides the owner with adequate assurances the work is satisfactory without the extra costs and burdens imposed by unnecessary retainage.
5. On many projects a performance bond guarantees the satisfactory performance of the contract. As a result, there’s no need to use retainage as additional security. On public work, and frequently on private projects, a contractor must provide a performance bond guaranteeing its completion of the contract. If a contractor defaults, the owner has recourse to the surety.
WORKING FOR REFORM
ASA also believes states must reform their laws to prohibit, or at least limit, retainage. Here are four reasons.
1. ASA recommends that any legislation dealing with retainage must make a clear distinction between withholding for cause and contractual retainage. It’s simply too easy for reform opponents to confuse policymakers about the differences without a working knowledge of the construction industry. Our job is to assure they are properly informed.
2. Retainage reform legislation should assure that a prime con-tractor retains no more from its subcontractors than the owner is retaining from it. Funds should be retained only if and when necessary to provide assurances that a job will be completed. If there is any doubt, the owner should retain those funds. Otherwise, the prime contractor can benefit from over-retaining from its subcontractors and investing such sums for its own use. As a job nears completion, a prime contractor that has retained more than necessary from its subcontractors will owe more to those subcontractors than the owner owes. Under such circumstances, a prime contractor has little incentive to bring a job to completion.
3. The owner should release retainage as each line item, listed separately on the schedule of values, is completed and approved. If the purpose of retainage is assuring completion of a contract, then funds should not be retained for a portion of a project after that part has been completed.
4. Retained funds should be held in an escrow account. The contractor has earned these funds. The owner is retaining them only to provide an extra level of assurance that the project will be completed according to the contract. Any benefit created by these funds should accrue to the subcontractor, not the prime contractor or the project owner.
Ultimately, ASA supports the complete elimination of retainage. It is an industry dinosaur and it’s time it was extinct.
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