Retainage and the Law

It is common practice on a construction contract for the paying party to retain a certain portion of each payment until project completion.  The amount held back from payment is commonly referred to as the "retainage."  The retainage can vary by contract but will commonly amount to 10% of the payment.  General Business Law Article 35E, Section 756-C, states that the retainage withheld must be "reasonable."  In addition, under Section 756-C the retainage withheld by a contractor must not be greater than the retainage withheld by the owner.  For example, if the owner retains 10%, the general contractor cannot retain more than 10% from the subcontractor.  When the owner releases a portion of the retainage to the general contractor, the general contractor must likewise release the same portion of the retainage to its subcontractors.  If retainage is not released as provided in Section 756-C of Article 35E then the party that is entitled to the retainage is entitled to collect interest on the unpaid retainage at the rate of 1% per month from the date that the retainage became due.

Understanding your rights to retainage payments and withholdings is important not only at the end of the project when you are waiting to recover your retainage but also at the contract formation stage.  By understanding your rights under the law you can prevent negotiating from a point of weakness when it comes to the issue of how much retainage will be held and when it will be released.  

Vincent T. Pallaci is partner with the New York construction law firm of Kushnick Pallaci PLLC where his practice focuses primarily on construction law.  With offices in Long Island and Buffalo, Kushnick Pallaci PLLC provides legal services to the construction industry across the State of New York.