Negotiating Retainage as a Construction Subcontractor
Most subcontractors in Oklahoma who've worked on construction projects have dealt with general contractors (GCs) withholding retainage. For those who are unfamiliar with the concept, though, retainage is basically just a portion of your contract funds that are withheld until the project manager is satisfied with your completed work.
Construction subcontractors, in particular, risk losing out on their contractually mandated funds because of an abuse of retainage. In fact, according to a 2004 report published by the American Subcontractors Association, the majority of subcontractors believe that "[prime] contractor abuse of their retainage" is a widespread problem.
In theory, retainage is a system intended to keep parties on a project honest about the work they provide. Unfortunately, this doesn't always work out quite so seamlessly for subcontractors.
How Retainage Impacts Subcontractors
The word ‘retainage’ can leave a bad taste in a subcontractor’s mouth before they even get started on a project. That’s because, unfortunately, too many construction companies have had bad experiences with retainage clauses. The wait to receive retainage funds, for example, can be agonizingly long, with an average wait time of 167 days. In some of the worst-case scenarios, subs have experienced waits of nearly 7(!) years to claim their rightfully earned retainage funds.
The long waiting periods negatively impact subcontractor’s cash flow. Thankfully, though, subcontractors aren’t without recourse. There are plenty of common characteristics in GC contracts for work that you can look for before signing off on it. By keeping your eyes peeled for standard GC retainage language, you won't get caught off guard nearly as often during a project by its retainage clauses.
Retainage Characteristics to Look For in GC Contracts
For the sake of your peace of mind, it's good to know upfront that most GC contracts for construction in Oklahoma allow the general contractor to withhold some amount of retainage. It's not uncommon for these GCs to withhold as much as 10 percent of your total contract value. In some GC contracts, this percentage can even exceed 10 percent of the contract value. When you spot this type of language, you should immediately have red flags going up.
Look for total retainage percentages as soon as possible when negotiating a construction contract. This can save you from being unpleasantly surprised by how much is being retained by a GC on a project you're working on. It’s also your best way of fighting back at GCs who try to exercise too much power over their subs when the project finally comes to an end.
Now that you know some of what to expect from retainage clauses as a subcontractor, it's a good idea to learn the contract language controls that you’ll need to work with on all your future projects.
Take Control of Your Contract Language
Let's start with some of the most typical GC contract language you’ll see, which probably goes something like, "A Contractor may withhold 10% retainage from all amounts owed to Subcontractor or the percentage of retainage held by Owner from Contractor, whichever is more, until all Work is complete and accepted by Owner and Contractor and final payment is received by Contractor from the Owner."
Seems pretty innocuous on its face, right?
Actually, contract clauses that are worded like this try to exploit a subcontractor's work by withholding retainage amounts that exceed how much retainage the project owner holds on a sub's work. Never be afraid to negotiate the amount of retainage a project owner is withholding. And, always remind a general contractor that, if project owners don't think you are entitled to payment, they wouldn't agree to release funds for your work in the first place.
If it's possible, also try to negotiate below a ten percent retainage with a general contractor on your project. Many general contractors feel confident enough to flat-out tell their subs that a ten percent retainage amount is a "standard industry practice". These days, that’s not necessarily true, so don’t be afraid to push back on a GC who says this.
While a ten percent retainage might have been standard a generation ago, these days industry leaders like ConsensusDocs and even the federal government (including many states) simply prohibit GCs from retaining more from their subs than the owner is retaining from the GC. You'll be surprised how much leeway a general contractor suddenly offers you once you present them with the facts about retainage and cite your sources.
Work With Legal Counsel to Draft Clauses of Your Own
So, what else can you do to tip the scales in your favor when it comes to retainage? With the help of your legal counsel, you should draft clauses for your work that require retainage reduction in phases as you complete your work on a project. These clauses typically look like requests for a one-time reduction in retainage, once you've completed 50-percent or more of your work.
In some cases, your legal counsel may advise requesting multiple reductions. You can achieve this by presenting clearly defined milestones for completed work to a general contractor. No matter what your clauses to negotiate retainage reduction look like, the purpose should always be the same: to bring the retainage a GC is holding closer to the value of your incomplete work, once you've substantially completed work on your project.
No matter what clauses you're thinking of drafting to bring retainage conditions into your favor, it's essential that you draft them with a legal counsel who’s experienced in supporting subcontractor retainage conditions.
For more than 30 years, Daffern Law Firm has been helping subcontractors achieve fair conditions for retainage and get paid. If you’re ready to start negotiating away retainage clauses that are hurting your cash flow, get in touch with Daffern Law Firm today.
