Subcontractors seek laws for faster retainage pay

Subcontractors frustrated with private contracts are taking steps to regulate retainage, but are losing the support of some general contractors.

The Capital City (Sacramento) chapter of the American Subcontractors Association sponsored a retention reform bill introduced to the California Senate June 2 that would impose a maximum of 10 percent retainage in private contracts.

After 50 percent of a job is complete, the bill would require no more than 5 percent retainage. It also proposes retained funds be returned with interest after completion of the contracted service, rather than after completion of the entire project.

Once a general contractor submits a bid to a private project owner, the owner establishes retainage — the percentage he or she will withhold from the bid until satisfied with the project. Because retainage cannot be collected before the entire job is finished and subcontractors are last to collect payment, it could take years before subcontractors are paid the full amount for their services. According to ASA, high rates and confusing contracts are leaving subcontractors in debt, primarily because the retainage process severely affects companies’ cash flow and credit.

While nearly 50 construction companies in California supported the bill, the local AGC chapter was listed in opposition. Its reason: the government should not interfere with private contracts.

Efforts to contact the local chapter were unsuccessful, but Mike Kennedy, general counsel for AGC headquarters, said it was essential to recognize the retainage process neither begins nor ends with general contractors. The owner, he said, not the general contractor, establishes and distributes retainage. Because the bill is targeted at private contracts, governmental involvement could infringe on individual rights, he said..

But David Mendes, ASA’s director of communications, said retainage reform, both private and public, is an issue at the forefront of the construction industry and should not be ignored.

“Retainage is a struggle that subcontractors almost universally have to contend to,” he said. “Imagine going to your dentist and telling him you’re holding 10 percent of his payment until you decide he’s done a good job. That’s kind of what retainage is like. A lot of expectations in the construction industry are changing now, and retainage is one that should definitely be reformed.”

Mendes attributed most retainage crises to poorly written contracts with no clear rules for retainage, as well as high retainage percentages on public and private projects. He said it was not unheard of to see 10 to 15 percent retainage rates, and unless contracts specified that retainage could not be suspended beyond the payment time, subcontractors who have completed jobs would have little leverage for demanding payment.