Retainage is always sore point for contractors, especially where an owner holds retainage for seemingly no good reason. On public works projects, for how long can retainage be withheld? More and more, I am seeing public contracts in Pennsylvania where the public owner – oftentimes townships or local authorities or school districts – will grant itself the right to withhold retainage of 5% and sometimes even 10% until the project is finally completed, including until after the completion of all punch list items. These contracts are often drafted by the hired architects or engineers who are woefully ignorant, sometimes intentionally, of the legal requirements applicable to public works contracts in Pennsylvania.
Can a public owner in Pennsylvania really hold retainage till the last nail is hammered? The short answer is no! The Commonwealth Procurement Code sets forth specific legal requirements for the withholding of retainage on public works contracts in Pennsylvania: 10% until the project is 50% complete, then 5% thereafter. When must the 5% retainage be released? At substantial completion, not final completion.
On this point, section 3941 of the Procurement Code provides:
§ 3941. Substantial/final payment under contract.
(a) Contract containing provision for retainage.–A contract containing a provision for retainage as provided in section 3921 (relating to retainage) shall contain a provision requiring the architect or engineer to make final inspection within 30 days of receipt of the request of the contractor for final inspection and application for final payment. If the work is substantially completed, the architect or engineer shall issue a certificate of completion and a final certificate for payment, and the government agency shall make payment in full within 45 days except as provided in section 3921, less only one and one-half times the amount required to complete any then-remaining uncompleted minor items, which amount shall be certified by the architect or engineer and, upon receipt by the government agency of any guarantee bonds which may be required, in accordance with the contract, to insure proper workmanship for a designated period of time. The certificate given by the architect or engineer shall list in detail each uncompleted item and a reasonable cost of completion. Final payment of any amount withheld for the completion of the minor items shall be paid upon completion of the items in the certificate of the engineer or architect.
This statutory provision is mandatory, is the express public policy of Pennsylvania, and cannot be altered by a take-it-or-leave-it agreement. Of course, this means that the contractor must still demand final inspection and apply for final payment before it can demand release of the retainage. If it does this, the burden then shifts to the public owner to carry out its statutory obligation, and the contractor should then be entitled to release of all retainage, except for the certified punch list amount.
So, if your project is substantially completed, you should request final inspection and final payment. If you are still owed retainage, except for the punch list, demand release of the retainage. If the public entity holds onto the retainage after it should be released, you are entitled to collect 10% interest on the withheld amount. If you don’t enforce your rights to retainage, you can be certain that the engineer overseeing the public project won’t either.
An earlier post on retainage can be found here.