{"id":900713,"date":"2023-01-05T15:23:02","date_gmt":"2023-01-05T22:23:02","guid":{"rendered":"https:\/\/www.myconstructionexpert.com\/blog\/?p=900713"},"modified":"2023-01-05T15:23:20","modified_gmt":"2023-01-05T22:23:20","slug":"retainage-and-prime-contractors","status":"publish","type":"post","link":"https:\/\/www.myconstructionexpert.com\/blog\/retainage-and-prime-contractors\/","title":{"rendered":"Prime Contractor Beware, No. 3: Tis The Season, but is your Retainage Safe Under the Tree?"},"content":{"rendered":"\n

David K. Taylor | BuildSmart<\/a><\/p>\n\n\n\n

Here\u2019s the Scenario:<\/strong>\u00a0Try explaining the concept of \u201cretainage<\/a>\u201d to a businessperson unfamiliar with the construction industry at your next holiday party. Here\u2019s the typical response as she spits out her eggnog: \u201cWait a minute: are you telling me that when work and materials timely supplied on a private commercial project are approved, the contractor and subcontractors have (depending on the state) 5%-10% withheld every month until the very end of a long project? That\u2019s just nuts!\u201d You respond: \u201cCrazy, but this is standard in the industry, even when profit margins are getting smaller and smaller.\u201d And the businessperson then says: \u201cWhere is this \u2018retainage\u2019 during this time, in a safe in the Grinch\u2019s cave? Your response: \u201cWell, while its mostly the subcontractors\u2019 retainage, since most prime contractors don\u2019t self-perform, maybe the retainage is with the owner or even the lender and it may not be actually set aside.\u201d The businessperson does her best Santa \u201cHo, Ho, Ho,\u201d shakes her head, heads back to the bar for more eggnog, and strongly suggests you should get yours spiked.<\/p>\n\n\n\n

A Warning<\/h2>\n\n\n\n

If you do historical research to find out where the heck the concept of retainage came from, you have to go back in England in the 1840s during a boom in railway construction called \u201crailway mania.\u201d With not enough competent contractors, and then a crash in the market, the railway companies began to withhold up to 20% to make sure that the work was properly and timely done. This concept somehow filtered over to the United States during the industrial revolution and has been in use ever since.\u00a0 The idea of \u201cprotecting\u201d retainage reached a legislative peak after the series of failed projects and bankruptcies that followed the 2008-2010 financial meltdown. Lenders foreclosed, wiped out any lien rights and then sold the projects without having to pay a dollar to the construction companies that built the half-completed projects. And where was the subcontractor retainage for approved work on these failed projects?\u00a0 Most of the time, it did not exist and had not been funded to the owner by the lender as set forth in a loan agreement. Poof, an invisible lump of coal shoved down your financial throat.\u00a0Recall from the\u00a0previous post<\/a>, the \u201cowner\u201d on any prime contract is typically a \u201climited liability\u201d company whose only asset is the heavily mortgaged land. Who may be holding the empty retainage bag when all the subcontractors all gather around the Prime office trailer tree with their hands out? Yep, prime contractors.\u00a0\u00a0 \u00a0<\/p>\n\n\n\n

So, what can a prime contractor do?<\/strong><\/h2>\n\n\n\n