MARCH PAY!
Retainage: An Idea Whose Time Has Come and Gone
The origin of retainage was a burgeoning
railroad industry in 1840s Britain that was growing so quickly that too
many construction firms started up for the amount of work that was
available. Railroad companies hedged their investments against the
resulting wave of bankruptcies by demanding a deduction of 20 percent or
more from payments in case a contractor couldn't complete the work it
promised. Given the volatile circumstances in which retainage
originated it is a historical oddity that retainage remains commonplace
today when construction markets are so very different. While
subcontractors have made progress against working with high levels of
retainage, the practice is widespread enough that they must still take
steps to protect their companies from the economically damaging effects of
retainage.
Even with warranties, bonds, alternative
sureties and the ability to extensively qualify subcontractors, many
customers (i.e., owners, general contractors and construction managers)
still see "all subcontractors as the same" and collect retainage
as if all subcontractors were in immediate peril of bankruptcy (as was
arguably in the case in 1840s Britian). The practice of retainage is
truly a vestige of another age. According to FMI Corp., most
subcontractors enjoyed their second-best year on record for revenues in
2002. The difference between contemporary markets - even during a
recession cycle - and the markets in which the practice of retainage
emerged couldn't be greater.
to counter retainage, subcontractors have
worked hard at educating all of the players in the construction industry
about problems such as reducing subcontractors' access to capital, bid
inflation to account for retainage, and the lack of motivation that
retainage provides to complete punch list work. These educational
efforts pay off, as evidenced by retainage reduction laws recently enacted
in Maryland, Mississippi, Missouri and New Mexico. Some individual
owners and general contractors have made efforts to minimize retainage,
such as the pharmaceutical giant Merck. ASA played a critical role
in all of these reform efforts, and reform efforts continue across the
country.
More often than not, subcontractors see
retainage at 10 percent or more. Even where retainage is very
limited (5 percent of the amount owed or less), subcontractors still need
to educate their customers about the harmful effects of retainage and
protect themselves with guarantees of timely and full release of
retainage. Strategies include:
-
Ensure that any proposed retainage is
consistent with your state law.
-
Do not accept a level of retainage that
is higher than is being retained from your customer by the owner.
-
Determine if retainage will be handled
differently at different stages of the project.
-
Have a clear understanding of when
funds will be released.
-
Obtain written guarantees that funds
owed to you will be segregated from other project funds.
-
Insist on being paid interest.
-
Ask for release of funds for work
successfully completed.
-
Especially on bonded projects, as to
eliminate retainage and provide a warranty.
These are just a few ways that you can
improve the experience of handling retainage. ASA will continue its
vital work to reduce and eliminate retainage. ASA's Payment Advocacy
Year (PAY!) Web pages at www.asaonline.com/pay.htm
contains many more ideas and retainage resources.
This article is provided in conjunction
with ASA's Payment Advocacy Year (PAY!)
(c) 2003 American Subcontractors
Association, Inc., ASA chapters have permission to reproduce this
article in all media. All other rights are reserved. |
