By: Paul R. Fitzgerald, Esq.
Perhaps no issue in the construction industry incites more passion and controversy than retainage. This article details Connecticut’s laws governing the withholding and release of retainage, as well as the remedies available to contractors and subcontractors who experience improper retainage practices.
Retainage is money that has been earned by a contractor or subcontractor but is not paid until a later stage of the project. In theory, retainage serves justifiable dual purposes: it provides a level of financial protection to the party withholding retainage, and it acts as an incentive for proper and timely completion of the work. In practice, however, retainage can be abused; some owners and general contractors improperly withhold retainage in order to force subs into a weaker financial position regarding otherwise meritorious claims. In an industry where profit margins are thin and maintaining cash flow is difficult, withholding retainage can create a huge financial strain on subcontractors.
While retainage is an unavoidable fact of life on most construction projects, contractors and subcontractors (as well as owners) should be aware of Connecticut’s unique laws which limit the withholding of retainage.
Maximum Allowable Retainage
The maximum amount of retainage that may be withheld on most public and some private projects in Connecticut is set by statute:
- For Department of Administrative Services (“DAS”) projects where the value of the contract exceeds $100,000.00, neither the DAS nor the general contractor may withhold more than 7.5% from any periodic or final payment which is otherwise properly due. When the project is 50% complete, retainage must be reduced to 5%. (Conn. Gen. Stat. §49-41b(1))
- For Department of Transportation (“DOT”) projects where the value of the contract exceeds $100,000.00, neither the DOT nor the general contractor may withhold more than 2.5% retainage. (Conn. Gen. Stat. §49-41b(2))
- For municipal projects where the value of the contract exceeds $100,000.00, retainage may not exceed 5%. (Conn. Gen. Stat. §49-41b(3))
- For private projects (excluding residential properties of four units or less) where the contract between the property owner and contractor exceeds $25,000.00, the maximum retainage that may be withheld is 5%. (Conn. Gen. Stat. §42-158k)
Any provision in a construction contract that purports to withhold retainage at a higher rate than permitted by statute is void and unenforceable. Moreover, any owner or contractor who withholds more than 5% retainage on applicable private projects may be required to pay the legal fees of any subcontractor who brings an action to collect retainage that is owed.
Retainage Accounts
On private projects where the contract between the owner and contractor exceeds $25,000.0- excluding residential properties of four units or less– the project owner must establish an escrow account for retainage. These accounts are governed by statute and are subject to the following requirements:
- All fees and expenses related to maintaining the account shall by paid by the owner.
- The owner is required to provide a monthly report to the general contractor, and any subcontractor who requests a copy, showing the value of the retainage being held in the account.
- If the owner fails to deposit retainage in the account or to release the retainage when required, the owner must pay the contractor an additional 1.5% of the amount not deposited or released for each month or fraction of a month, until the retainage amount is paid in full.
- An owner may accept securities in lieu of retainage from a contractor and a contractor may accept securities in lien of retainage from a subcontractor.
- If a contractor or subcontractor is required to bring a lawsuit to enforce any provision of this statute and prevails at trial, the contractor or subcontractor is entitled to its attorney’s fees.
Retainage escrow accounts benefit subcontractors in a number of ways. First, the retainage cannot be diverted or used by the owner for unwarranted purposes. Second, the retained funds are out of the reach of creditors if the owner experiences financial difficulties. Unfortunately, escrow accounts are not required for retainage on public projects in Connecticut.
Release of Retainage
Retainage is sometimes withheld for months after the completion of a project, which serves no justifiable purpose and can impose serious economic hardships on subcontractors. Thankfully, the Connecticut Legislature recently addressed this unscrupulous practice by amending Conn. Gen. Stat. §42-158k, which applies to private projects subject to the 5% retainage cap. (See August 2017 MKRB Blog)
The statute now requires the full release of retainage within 30 days after the issuance of a certificate of final completion by the project owner or the project owner’s representative, or equivalent written acceptance of the work by the owner. This amendment prevents owners from holding onto retainage for as long as they can. Any owner that violates this statute may be required to pay a claimant’s attorney’s fees.
On DAS projects, retainage must be reduced from 7.5% to 5% no later than 90 days after the general contractor or subcontractor has submitted an application for payment demonstrating that 50% of its contract has been completed.
Conclusion
Retainage can be a huge burden for Connecticut contractors and subcontractors. All parties to construction contracts in Connecticut should be aware of the retainage limitations, escrow account requirements, and prompt payment laws that are meant to limit abusive withholding practices.
If you have questions about Connecticut’s retainage laws, or if you feel your retainage has been wrongfully withheld, please contact us. Our attorneys routinely secure the release of our clients’ retainage. We can be reached at 860-522-1243.
Michelson, Kane, P.C.
