Retainage Issues in New Jersey Construction Law

Retainage Issues in New Jersey Construction LawRetainage

Our attorneys represent owners, builders, contractors, subcontractors and suppliers with issues concerning retainage.  New Jersey construction law is complex, and retainage is one of its most important, and most intricate, areas.  It is one that results many disputes.  Our construction attorneys help parties negotiate and draft construction contracts which protect their rights, and we fight aggressively for them when disputes arise.

Retainage in New Jersey Construction Law

The term “retainage” refers to an agreed upon sum, usually a percentage, of the contract amount, which is withheld from the contractor by the owner (or from the subcontractor by the prime contractor) until the project is “substantially complete” as insurance that the contractor or subcontractor will meet its contractual requirements and successfully complete its work.  It is a powerful incentive to compel performance – the threat of withholding the retainage is a powerful incentive for the contractor or subcontractor to complete its work successfully and in a timely manner.  Likewise, it provides a source of funds for the owner in the event that the contractor defaults (or for the general contractor if one of its subcontractors defaults).

However, it is also a source of considerable dispute.  “Substantially complete” is a term of art at best, but more often a source of confusion and dispute.  Much litigation has occurred because of differing definitions of “substantially complete.”

In some ways, retainage serves a purpose similar to a surety bond, in that it protects the owner in the event of default (or the contractor if a subcontractor defaults).  However, it does not serve all of the functions of a bond; for instance, it does not provide as much of an incentive for the contractor to swiftly complete the construction project.  Therefore, many times retainage will be required even when a surety bond is in place.

Drafting and Negotiating Contracts Dealing with Retainage

The concept of retainage began almost two centuries ago in Britain to compel contractors to complete work on railroad projects.  In almost all cases, it is a creature of contract.  Whether there will be retainage, what the sum will be, how it is determined, and when it will be paid, are all subjects governed by the prime contract between the owner and general contractor, or subcontracts between the general contractor and subcontractors, or among lower tier subcontractors.

In general, the parties are free to negotiate whatever terms they wish for retainage, and even if there is to be any retainage at all.  Typically retainage is a percentage of the contract, ranging from one to ten percent.

However, New Jersey construction law limits the amount of retainage which governmental units may contract to withhold, normally to no more than two percent, although in some circumstances this may be higher.

Our construction attorneys have decades of experience negotiating and drafting contracts.  We meet with our clients to discover their particular needs, and work to craft a contract which meets those their needs, including protecting their interests when it comes to retainage.

Retainage and the Prompt Payment Act 

The New Jersey Prompt Payment Act  protects construction contractors and subcontractors by requiring that their undisputed bills be paid in a short period of time.  The New Jersey Legislature included this provision to protect contractors and subcontractors which have fully performed their work.

The Prompt Payment Act generally requires that contractors get paid by owners all funds due – including retainage – within thirty days from when the invoice is “approved and certified;”  it is deemed approved an certified twenty days after receipt if no objection is made. Contractors must pay subcontractors (and subcontractors must pay lower tier subsubcontractors) within ten days after receipt of payment for that work, provided that the subcontractor has fully performed, the owner has not objected, and there is no other agreement in writing; in the case of partial payments, the subcontractor must have performed to the satisfaction of the general contractor.  The time periods may be longer in contracts on government projects.

Our construction attorneys represent contractors, owners and subcontractors in disputes over the New Jersey Prompt Payment Act.  We have successfully defended owners and contractors from claims that they violated the Prompt Payment Act, and used it as a tool for contractors and subcontractors which have performed their work but nonetheless not been paid.

Construction Litigation About Retainage Disputes

Our litigators represent owners, contractors and subcontractors in construction litigation.

Disputes over retainage are frequent.  For instance, owners, contractors and subcontractors often disagree on when the project is “substantially complete” or on items included on a punch list; and they often disagree on when the retainage should be released.

Since disputes frequently arise over retainage, the best thing that an owner and contractor can do is to draft a clear retainage provision regarding the amount of retainage to be held and objective benchmarks for when the retainage will be released.  The meaning of “substantial completion” should be spelled out. Likewise, it is smart to include provisions for how disputes will be resolved, such as mediation, arbitration  or where litigation should be held.  At a minimum, some requirement for attempting to resolve the dispute prior to either party filing suit should be included so as to minimize the costs and risk for all parties.

However, we have experienced litigators who fight aggressively for our clients when disputes cannot be resolved, and have achieved considerable success.

Retainage and Subcontractors

Retainage in the context of subcontractors can create some particularly difficult issues.  A contractor may require a higher percentage of retainage from its subcontractor than is being withheld from it by the owner.  This may, for instance, be necessary for the contractor to finance the project.  However, it gives the contractor a disincentive from promptly paying the subcontractor, since it will be paying the difference from its own operating funds rather than the retainage it receives back from the owner, and the contractor may have already spent the difference on this or other projects.

Subcontractors and owners can protect themselves from this situation through various contractual remedies, such as a provision prohibiting any contractor or subcontractor in the chain from charging more retainage than is being withheld from them, or requiring that the difference is held in an escrow account. 

Contact Us

Our attorneys represent owners, contractors, subcontractors and suppliers in all aspects of New Jersey construction law, including retainage issues.  Please call (973) 890-0004 or e-mail us to set up an appointment to discuss how we can help you, be it drafting construction contracts which protect your interests, or defending your rights in litigation or arbitration.

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