Introduction
Most, if not all, construction contracts contain a provision for “retainage.” The origin and concept of retainage dates back to the railroad boom that embraced Great Britain in the 1840s. In its simplest terms, retainage is a mechanism by which an owner or general contractor withholds disbursement of funds from the payment of a requisition in order to secure future performance of a contract and/or to pay for repair of defectively performed work. Retainage typically ranges from five to ten percent, with the amount being reduced as the project progresses to substantial and final completion. One of the reasons for withholding retainage is to incentivize a contractor to complete its work in accordance with the contract terms and conditions. While this may be well-intentioned in concept, it all too often leads to abuse that impacts project cash flow and raises tension between the parties. This typically happens on projects that have delay issues, deficient drawings, and/or claims of defective work. When a project has “gone bad,” the withholding of retainage is one of the first things that an owner will latch onto in order to leverage its position against a contractor. In order for a contractor to put itself in the best position possible, the following negotiation techniques and protective measures should be kept in mind.

Know Your Applicable Statute
Every state except West Virginia has statutes in place that govern the payment of retainage on public projects. On federal projects, the amount of retainage withheld shall not exceed ten percent as set forth in the Federal Acquisition Regulations (“FAR”). The common thread running through these statutes is the payment of interest as a remedy when the retainage is not timely paid. Historically, most retainage statutes were applicable only to publicly funded projects. This has recently changed with a substantial number of state legislatures recognizing that the payment of retainage on private projects was a serious enough problem to warrant regulation. These include Alabama, Arizona, California, Colorado, Connecticut, Idaho, Illinois, Kansas, Louisiana, Maine, Maryland, Massachusetts, Minnesota, Missouri, Montana, Nebraska, Nevada, New Mexico, New York, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, and Vermont. New York’s retainage laws relating to private projects were enacted only this past November.