New retainage law impacts construction projects

and Don Dagenais

Attorney

sbj@sbj.net

Randell Wallace and Don Dagenais are partners with Lathrop & Gage. Wallace is a member of the firm's real estate, financial institutions and corporate practice groups in Springfield. Dagenais practices real estate law in Kansas City.

A recently effective new law in Missouri substantially affects the way Missouri's construction-project owners, contractors and subcontractors will handle retainages in the future. The law, which applies to private construction projects except residential construction of four or fewer units, has practical implications and potential administrative complications.

A retainage is money that is held to pay contractors and subcontractors.

The bill sets a 10 percent limitation on construction retainages. A construction-project owner can no longer withhold from a contractor more than 10 percent of each progress payment, which is paid when the construction is finalized. Likewise, a general contractor cannot retain more than 10 percent of each progress payment from its subcontractors, and so on down the line. Also, a general contractor cannot require a higher retainage from its subcontractors than the owner imposes upon the contractor.

This, in turn, applies to each tier of contracts throughout the chain of subcontracts on a construction project.

One exception to the law is if the contractor, or any other person in the chain of contracts on a construction project, posts a "substitute security," which is a certificate of deposit from a national or state bank, a letter of credit from the same or a retainage bond issued by the responsible surety company. This allows them to get the retainage paid back in cash even before the project is complete. Once the substitute security is posted, the party holding the retainage must pay it in cash to the contractor or subcontractor within five working days.

Upon substantial completion of a construction project, the law imposes a 30-day deadline for the owner's release of retainage amounts (or substitute security) to the contractor. The contractor, in turn, must release subcontractors' retainages (or substitute security) within seven days after receiving the retainage payment from the owner. These release provisions are, however, subject to the possibility that an owner or a contractor can withhold 150 percent of the cost of completing any so-called "punch list" items.

It's important to know that the statute contains a controversial provision: if a particular subcontractor's performance is "satisfactorily" completed before substantial completion of the project, then the contractor will need to request an advance from the owner to pay the subcontractor their retainage in full. And since the project is still technically incomplete in the eyes of the owners and contractors, it's uncertain if their work will end up being "satisfactory" or not.

The law specifically says that any retainages held by the owner are "in trust" for the benefit of the contractor and other companies involved with the construction project. This raises the possibility of fiduciary liability (i.e. liability for misapplication of money held in trust) on the part of an owner who misdistributes or misreleases retainage funds. Owners who do this could possibly incur punitive damages for such mistakes.

Fortunately, the law does not require that a retainage be released to a contractor or subcontractor who is in default. The statute does, however, provide that any contract signed after Aug. 28 that fails to comply with the statute's provisions is unenforceable to the extent of the inconsistency, and imposes 18 percent interest on any amounts found to be owing under the statute.

Furthermore, it authorizes the collection of attorney's fees against anyone found guilty of violating the statute. The law is unclear as to whether it applies to subcontracts entered into after Aug. 28, when the general contract was signed before Aug. 28.