Retainage in New Jersey Construction Law

Retainage in New Jersey Construction Law

One of the areas which our construction lawyers often address is retainage.

The Use Retainage in New Jersey Construction Law

Retainage is an important device in construction law. Our attorneys have helped New Jersey contractors, subcontractors, owners and construction suppliers with issues related to retainage.

Retainage is an amount intentionally withheld from payment. It may be withheld by an owner from payment to a contractor, from a general contractor, to a subcontractor, or from a subcontractor to a lower tier subsubcontractor.

Retainage in Construction Contracts & Drafting Effective Retainage Provisions

Retainage is a creature of contract law. It is governed by the provisions of the contract or subcontract between the parties. Whatever the contract says about retainage will control; and if retainage is not provided for in the contract, it is not allowed.

Since the terms of the retainage are governed by the terms of the contract or subcontract, drafting the contract is extremely important. It is essential to have an experienced attorney on your side. Our construction attorneys negotiate and draft contracts, subcontracts and supplier contracts. We review construction contracts for our clients and advise them on their rights and responsibilities.

Litigation Over Construction Disputes

Disputes are common, as retainage is typically required to be paid when the work is “subtanitially complete.” Parties often disagree on what that term means. When these disputes arise, our attorneys fight aggressively for our clients’ rights in negotiations, mediation, arbitration and litigation. However, we first attempt to avoid these disputes by drafting clear language in contracts which protect our clients’ rights.

Typical Retainage Provisions in Construction Contracts

Typically, the amount of retainage is expressed as a percentage of the contract price, or as a particular percentage of a progress payment. These percentages typically run from one to ten percent. In many cases, the retainage will be taken at the beginning of progress payments, and then phased out. For instance, a typical provision allows for retaining ten percent of the progress payments until the project is fifty percent complete, and then the retainage ceases; this effectively means that the retainage is only five percent – ten percent of the first fifty percent of progress payments.

Unique Retainage Issues in Government Construction Projects

New Jersey construction law limits the amount which governmental entities may retain. However, exceptions do apply. For instance, in the case of Township of Middle v. Public Developers Corporation, the Chancery Division of New Jersey’s Superior Court ruled that in these particular circumstances the Township of Middle, in Cape May County, could withhold more retainage than the two percent which was allowed under the New Jersey Local Public Contracts Law because the project received funds from the Federal Farmers Home Administration (known as the “FHA”), and the FHA’s regulations required a higher percentage rate of retainage. The judge ruled that In such a case the Federal regulations preempted the New Jersey Local Public Contracts Law and the town was required to use the higher percentage rate.

However, when an exception does not apply, the governmental authority is bound by its legal requirements about how much retainage it is allowed to withhold. For instance, in the case of Carbro Construction Company v. Middlesex County Utilities Authority, the Appellate Division of New Jersey’s Superior Court ruled that the Middlesex County Utilities Authority, a governmental authority, could not withhold two percent of each progress payment for retainage – the amount it was legally capped at retaining – and also withhold another two percent for “security for fulfillment of the contract.” The court reasoned that the two percent security was essentially the same thing as the two percent retainage, thereby making the entire amount of retainage four percent, which exceeded what the authority was legally allowed to retain. The court therefore ordered that the contract be rebid, ie., give other bidders the chance to rebid the contract without the extra “security” provision.

The Effect of New Jersey’s Prompt Payment Act on Retainage in Construction Contracts

New Jersey’s Prompt Payment Act also governs the payment of retainage to contractors, subcontractors, and subsubcontractors. The Prompt Payment Act requires owners to pay their contractors (and contractors to pay their subcontractors) all amounts due under “approved and certified” invoices, including retainage, in a swift manner – the timeframes are thirty days from approval and certification for payment to contractors and ten days from the contractor’s receipt of payment for payment to its subcontractors, although many factors may lengthen the time. The requirements of the New Jersey Prompt Payment Act also govern payment of retainage.

Contact Our New Jersey Construction Attorneys

Please visit our website, call (973) 890-0004, or e-mail us to set up a time to speak with one of our construction lawyers regarding any issues you have relating to retainage, or any construction law matter in general. We can help.