How to Deal with Terms Where 'Retainage for Sub Is More Than for GC'
While the federal government has adopted policies strongly discouraging the use of retainage on federal projects and on federally-funded transportation projects, the practice of retainage remains prevalent in both public and private contracts.
Many subcontracting firms are reluctant to get involved in contracts with excessive retainage, because it can tie up their capital and, in some instances, can force them to borrow money to meet expenses. Retainage perpetuates adversarial relationships that marginalize and reduce individual and collective performances on the job. The very premise of retainage is based on lack of trust.
Furthermore, the general contractor may have a disincentive to complete the project if it is retaining more from its subcontractors than the owner retained from it. Most model construction industry contracts reference retainage, suggesting its pervasiveness in privately-owned construction.
ASA recommends that typical retainage language, such as "the General Contractor shall retain ten percent of the amount of each progress payment to the Subcontractor," should be replaced with:
"Customer shall not deduct retainage from Subcontractor's payments except to the extent of retainage held by project owner on Subcontractor's work."
General contractors may argue, "It's really none of your business how much the owner retains." In this case, the subcontractor could reply, "If the owner felt that we were not entitled to payment, he wouldn't have released the funds for our work." If the general contractor says, "Ten percent retainage is standard industry practice," the subcontractor could respond: "That may have been true a generation ago. But today, industry leaders like ConsensusDocs and even the federal government and many states prohibit GCs from retaining more from their subs than the owner is retaining from the GC." You can find more tips on how to negotiate improved retainage clauses on ASACP's website.
ASACP is pursuing legislation to limit retainage to no more than 5 percent on private work in Pennsylvania. Please see below on how you can contribute to the effort and join our Payment Task Force.
