Retainage
The concept of retainage—that a portion of a contractor or subcontractor’s payment is withheld by the owner until the completion of the project—has long been as common as it is contentious in the construction industry. Owners have long viewed retainage (often called retention) as a key financial incentive to ensure that contractors satisfactorily complete their work.
Contractors, however, argue that owners often hold excessively high amounts and are frequently slow to pay out retainage. Furthermore, contractors complain that owners often use large withheld retainage as leverage while they negotiate final closeout and the payment of disputed change orders with the contractor. Contractors and subcontractors insist that such practices can put significant strain on their cash flows, particularly impacting smaller firms. For many years, a withholding amount of ten percent from each progress payment was commonplace for private owners.
New York’s Recent Legislative Change
On November 17, 2023, New York Governor Kathy Hochul signed Senate Bill S3539, which modified New York’s Prompt Payment Act, effectively immediately. The bill’s sponsors asserted that “[u]nder the current law governing private construction jobs, subcontractors are subject to long waiting times, as long as a year after the completion of a construction project, to receive retainage payments.”
To address this issue, the bill amends sections 756-a and 756-c of the New York General Business Law to require payment by owners of all retainage within thirty days after final approval of the work, and restricts the amount of retainage to no more than five percent. These new rules govern any private construction contract where the aggregate cost of all work exceeds $150,000. Under the revised statutes, any amounts withheld in excess of the five percent limit or not timely repaid are subject to a one-percent-per-month penalty.
New York Change Follows Recent Trends
This move by New York is consistent with a broader national trend aimed at reforming retainage practices on private projects. While many states have long capped retainage on public projects at five percent, traditionally only a few states have applied this rule to private projects for their entire duration. Yet this has changed recently. In the past ten years, at least seven other states—including Colorado, Connecticut, Massachusetts, Minnesota, Oregon, Rhode Island, and Washington—have similarly barred retainage above five percent on private projects.
New York Opted Not to Allow Bonds in Lieu of Retainage
New York, however, did not follow the two other states that most recently lowered maximum retainage on private projects to five percent in one respect. Both Washington state (in 2023) and Oregon (in 2024) not only reduced maximum retainage, but also mandated that contractors on certain private projects must be allowed to post a surety bond in the amount of retainage in lieu of having amounts withheld from progress payments. New York is not alone in eschewing retainage bond substitution. Even with Oregon’s recent change, such private project bond substitution rules remain rare.
Impact on the Industry
Contractors and subcontractors of course have welcomed the changes in these states. Following the New York amendments, the Subcontractors Trade Association called the law “groundbreaking” and a “fundamental shift toward greater financial stability and equitable treatment for all involved in private construction projects within the state.”
Similarly, a representative of the Association of General Contractors in Washington state testified in support of the bill, calling it “a matter of fairness” and stating that “anything above that is problematic and almost abusive.”
Given the lack of strength of any comparable owner advocacy organizations, this trend seems unlikely to reverse itself, and instead may spread to some of the approximately forty states that currently do not restrict private project retainage to five percent.