This post is the first in a series on the basic concepts and tenets of public contracting in Pennsylvania.
Public works contracts in Pennsylvania may include a provision for the withholding of retainage. Retainage is a sum of money which is withheld from payment until the contract is completed.
However, under the Pa. Procurement Code chapter applicable to public works contracts, the retainage cannot exceed 10% of the amount due the contractor. When the contract is 50% completed, one-half of the amount retained by the government agency must be returned to the contractor, provided that the architect or engineer approves payment, and provided that the contractor is making satisfactory progress, and there is no other reason for holding more retainage, such as a backcharge claim. After the contract is 50% completed, the retainage cannot exceed 5% of the value of the completed work.
For multiple-prime projects, the government agency can hold additional amounts as retainage, equal to one and a half times the amount of any possible liability, where there is a dispute between the prime and the government agency based on increased costs claimed by one prime caused by the delay of another prime . This additional retainage can be withheld until such time as a final resolution is agreed to by all parties directly or indirectly involved unless the prime causing the additional claim furnishes a bond satisfactory to the government agency to indemnify the agency against the claim.
Retainage may be withheld from the contractor only until substantial completion of the contract.
If the government agency refuses to follow the foregoing rules, it may be liable to the contractor for interest and penalties on the wrongfully withheld amount. Furthermore, while government agencies often attempt to impose varying retainage provisions and requirements in their forms of contracts (typically AIA forms), such provisions are likely unenforceable as they contradict the statutory provisions of the Procurement Code.
Unless there is sufficient reason, a contractor must pay all of its subcontractors their earned share of the retainage the contractor received within 20 days of the receipt by the contractor.
The Pennsylvania statute on retainage (62 Pa.C.S. §3921) can be found here.