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The retainage policyAn idea whose time has come and gone
The origin of retainage was a burgeoning railroad industry in 1840s Britain that was growing so quickly that too many construction firms started up for the amount of work that was available.
Railroad companies hedged their investments against the resulting wave of bankruptcies by demanding a payment deduction of 20 percent or more in case a contractor couldn't complete the work it promised. Given the volatile circumstances in which retainage originated, it is a historical oddity that retainage remains commonplace today when construction markets are so very different.
While subcontractors have made progress against working with high levels of retainage, the practice is widespread enough that they must still take steps to protect their companies from the economically damaging effects of retainage.
Even with warranties, bonds, alternative securities and the ability to extensively qualify subcontractors, many customers (owners, general contractors and construction managers) still see "all subcontractors as the same" and collect retainage as if all subcontractors were in immediate peril of bankruptcy, as was arguably the case in 1840s Britain. The practice of retainage is truly a vestige of another age.
According to FMI Corp., most subcontractors enjoyed their second-best year on record for revenues in 2002. The difference between contemporary markets — even during a recession cycle — and the markets in which the practice of retainage emerged couldn't be greater.
Fighting retainage
To counter retainage, subcontractors have worked hard at educating all of the players in the construction industry about problems such as reducing subcontractors' access to capital, bid inflation to account for retainage and the lack of motivation that retainage provides to complete punch-list work. These educational efforts pay off, as evidenced by retainage reduction laws recently enacted in Maryland, Mississippi, Missouri and New Mexico.
Some individual owners, such as the pharmaceutical giant Merck, and general contractors have made efforts to minimize retainages. ASA played a critical role in all of these reform efforts, and reform efforts continue across the country.
More often than not, subcontractors see retainage rates at 10 percent or more. Even where retainage is very limited (5 percent of the amount owed or less), subcontractors still need to educate their customers about the harmful effects of retainage and protect themselves with guarantees of timely and full release of retainage.
Strategies include:
- Ensure that any proposed retainage is consistent with your state law.
- Do not accept a level of retainage that is higher than is being retained from your customer by the owner.
- Determine if retainage will be handled differently at different stages of the project.
- Have a clear understanding of when funds will be released.
- Obtain written guarantees that funds owed to you will be segregated from other project funds.
- Insist on being paid interest.
- Ask for release of funds for work successfully completed.
- Especially on bonded projects, ask to eliminate retainage and provide a warranty.
These are just a few ways that you can improve the experience of handling retainage. ASA will continue its vital work to reduce and eliminate retainage. ASA's Payment Advocacy Year Web page at www.asaonline.com/pay.htm contains many more ideas and retainage resources.
This article is provided in conjunction with ASA's Payment Advocacy Year.
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