Ah yes, retainage, what could represent your profit on a project and something frequently abused by owners on private and public projects alike. Fortunately, Pennsylvania law offers public works contractors some protection from retainage abuse. The Public Prompt Payment Act dictates when retainage can be withheld and when it must be released. Agencies that fail to follow the Prompt Payment Act’s retainage rules can end up owing you interest, penalty, and attorneys fees.
The Prompt Payment Act’s Retainage Provisions
The Prompt Payment Act deals with retainage in two sections: 3921 and 3941. Section 3921, 62 Pa.C.S.A. 3921, authorizes a government agency to withhold retainage. But, in general, it limits the amount of retainage withheld to 10%, which is industry standard. However, Section 3921 states that at 50% completion, the government agency must release 50% of the retainage withheld and retainage must be reduced to 5%. There are a two caveats. First, in order to receive the retainage reduction, there must not be a reason to hold retainage at 10%. Second, where the Department of General Services (DGS) is the owner, retainage is capped at 6% and must be reduced to 3% at 50% completion.
Section 3941, 62 Pa.C.S.A. 3941, the project’s architect or engineer must make a final inspection of the work within 30 days of your final payment request. If the work is found to be substantially complete, the government agency is required to make payment within forty-five days. If the architect or engineer finds certain work is incomplete, it must identify that work in detail and the government agency may withhold 1.5 times the amount to complete that work. The architect and engineer must also identify the estimated cost to complete the work.
The Prompt Payment Act’s Retainage Penalties
Under Section 3941(b), 10% interest is tacked on to retainage that is not paid within forty-five days of substantial completion. Under Section 3935, if the government agency is found to have withheld retainage in bad faith, it may be liable for a additional interest at 1% per month and reasonable attorneys fees.
Payment of Retainage to Subcontractors
The Prompt Payment Act contains an important provision regarding payment of retainage to subcontractors. Prime contractors are required to pay retainage to subcontractors within twenty days of receiving retainage from the owner. Therefore, if you are a subcontractor and have not received at least a 50% retainage reduction and you know the project is more than 50% complete, you need to start asking questions of the prime contractor.