Retainage is designed to provide financial security during construction, but it frequently becomes a source of conflict when a project approaches completion and substantial funds remain withheld. Owners may contend that incomplete work, defects, closeout obligations, liens, or unresolved claims justify continued retention, while contractors and subcontractors may argue that the work has been completed and the money is being held beyond the period permitted by the contract or California law.
Escrow arrangements can add another layer of complexity. On California public works projects, contractors may have statutory rights to substitute qualifying securities for retained funds or direct retention into an escrow arrangement under specified conditions. Certain larger private construction projects are also subject to separate statutory construction security requirements. When disagreements arise over release conditions, disputed work, defaults, investment proceeds, or control of escrowed funds, payment disputes can become both contractual and statutory litigation.
What Is Retainage in Construction?
Retainage, also called retention, is a percentage of money earned under a construction contract that is temporarily withheld from progress payments. The withheld amount is intended to provide security for satisfactory completion of the project and resolution of certain outstanding performance issues.
Retention may be withheld:
- By an owner from a direct contractor;
- By a general contractor from a subcontractor;
- By a subcontractor from a lower-tier subcontractor; or
- At multiple contractual levels simultaneously.
Although retention is intended to protect against unfinished or defective work, it is still money earned through construction performance. California prompt payment statutes therefore establish limits on when retention can continue to be withheld after completion or receipt of the funds upstream.
Why Retainage Disputes Develop
Retainage disputes commonly arise because the parties disagree about whether the conditions necessary for final payment have been satisfied.
Potential disputes may involve:
- Incomplete work;
- Punch-list items;
- Defective or nonconforming construction;
- Unresolved change orders;
- Backcharges;
- Delay damages;
- Outstanding mechanics liens or stop payment notices;
- Missing warranties or closeout documents;
- Failed inspections;
- Incomplete commissioning;
- Pending claims by lower-tier subcontractors; or
- Disagreement over whether the project has legally reached completion.
The existence of a dispute does not necessarily authorize a party to withhold the entire retention balance. California law can limit both the type of dispute that supports withholding and the amount that may be retained.
Private Construction Retention Is Subject to California Prompt Payment Rules
On qualifying private works of improvement, California Civil Code Section 8812 generally requires an owner that has withheld retention from a direct contractor to pay that retention within 45 days after completion of the work of improvement.
If there is a good-faith dispute concerning a retention payment that is due, the owner may generally withhold no more than 150 percent of the disputed amount.
This distinction is important. A limited disagreement concerning a portion of the project does not necessarily justify withholding all remaining retention.
For example, a dispute concerning the reasonable cost to complete a small portion of unfinished work may support retention of an amount connected to that dispute, but the parties should separately evaluate whether the remaining undisputed retention must be released.
Subcontractor Retention on Private Projects Has a Separate Deadline
California Civil Code Section 8814 generally requires a direct contractor that has withheld retention from subcontractors to distribute each subcontractor’s share within 10 days after receiving all or part of the retention from the owner.
If the owner’s payment is specifically designated for a particular subcontractor, that retention generally should be paid to the designated subcontractor when consistent with the subcontract.
A direct contractor may withhold part of a subcontractor’s retention when a qualifying good-faith dispute exists, but the amount generally cannot exceed 150 percent of the estimated value of the disputed amount.
This means that payment received upstream should not automatically remain with the general contractor simply because some unrelated project disagreement remains unresolved.
The Dispute Must Relate to the Payment Being Withheld
California courts have limited the use of unrelated disputes as a justification for holding retention.
The California Supreme Court has explained that the good-faith dispute exception to the retention payment rules generally applies when there is a dispute concerning a statutory or contractual condition affecting the particular payment, such as the adequacy of the work for which the retention serves as security.
A contractor ordinarily cannot continue withholding an otherwise undisputed retention payment merely because the subcontractor is separately seeking additional compensation for unrelated change orders or other claims.
Relevant retention-related disputes may include:
- Whether the underlying work was properly completed;
- Whether corrective work remains necessary;
- Whether third-party liens expose the payer to potential double payment;
- Whether contractual closeout requirements affecting final payment remain unsatisfied; or
- Whether the amount of retention itself is genuinely disputed.
The connection between the dispute and the withheld money can become a central issue in litigation.
Acceptance of Disputed Work Can Trigger Payment Obligations
California Civil Code Section 8816 provides a procedure addressing disputed work on private projects.
If a direct contractor gives the owner, or a subcontractor gives the direct contractor, notice that disputed work has been completed in accordance with the contract, the receiving party generally must provide notice within 10 days stating whether the work is accepted or rejected.
Once the disputed work is accepted, the portion of retention relating to that work generally must be paid within 10 days.
This procedure can be important when an owner or contractor continues withholding money based on punch-list or corrective work that the claimant believes has already been completed.
Wrongful Retention Withholding Can Trigger Significant Penalties
The financial exposure associated with wrongful withholding can extend beyond the unpaid retention balance.
Under California Civil Code Section 8818, an owner or direct contractor that fails to make a required private-project retention payment can be liable for a penalty of 2 percent per month on the amount wrongfully withheld, in place of otherwise applicable interest.
The prevailing party in an action to collect wrongfully withheld retention may also be entitled to reasonable attorney’s fees and costs.
These remedies can materially increase the value of a dispute when retention remains unpaid for an extended period.
Public Works Retention Is Governed by Different Rules
Public construction projects are subject to separate California Public Contract Code provisions.
Public Contract Code Section 7107 generally requires a public entity to release retention within 60 days after completion of a public work of improvement, subject to permitted withholding for qualifying disputes.
If there is a dispute between the public entity and the original contractor, the public entity may generally withhold from final payment an amount not exceeding 150 percent of the disputed amount.
What constitutes completion for purposes of the statute can include specified events such as public agency acceptance or certain circumstances involving occupation, beneficial use, or cessation of labor.
Because the statutory definition can affect when the release period begins, disputes sometimes focus on the legal completion date rather than the physical date on which most construction ended.
Public Works Subcontractors Generally Receive Retention Within Seven Days
After the original contractor receives all or part of the retention from the public entity, Public Contract Code Section 7107 generally requires the contractor to distribute each subcontractor’s share within seven days.
A contractor may withhold an amount associated with a bona fide dispute involving the subcontractor, but the amount generally cannot exceed 150 percent of the estimated value of the disputed amount.
If retention payments are wrongfully delayed beyond the statutory periods, Section 7107 can impose a charge of 2 percent per month on improperly withheld funds. A prevailing party in an action to recover wrongfully withheld retention may also recover attorney’s fees and costs.
Public Works Retention Is Generally Capped at Five Percent
California Public Contract Code Section 7201 generally limits retention on covered public works contracts to 5 percent of each payment and generally limits total retention to 5 percent of the contract price.
The limitation applies through multiple contracting tiers, and downstream retention generally cannot exceed the retention percentage imposed under the public entity’s contract with the original contractor.
There are statutory exceptions. For example, a public entity may be permitted to require greater retention on a specific project that has been properly determined to be substantially complex, provided the statutory procedures and bid-document requirements are satisfied.
Additional exceptions can apply under specified bonding circumstances involving subcontractors.
Contractors should therefore review both the statute and the actual bid documents before assuming that every public project must use exactly the same retention percentage.
Retainage Should Be Distinguished From Other Payment Withholding
Not every amount deducted from a progress payment is legally retention.
A payment application may also be reduced because of:
- Backcharges;
- Defective work;
- Unapproved change orders;
- Liquidated damages;
- Incomplete quantities;
- Missing documentation;
- Claims by other contractors;
- Offsets; or
- Disputed progress billing.
This distinction matters because specific retention statutes may apply only to funds that are actually being withheld as retention.
A party should identify the true nature of each withheld amount rather than describing every unpaid balance as retainage.
What Is a Construction Escrow Arrangement?
An escrow arrangement places money, securities, or other property with an independent escrow agent subject to agreed conditions governing release.
In construction, escrow may be used to protect the owner’s interest in performance while reducing the contractor’s cash-flow burden associated with retention.
Instead of leaving cash retention entirely in the hands of the public entity, a statutory escrow mechanism may permit qualifying securities or retained money to be held through an approved arrangement until the contract is satisfactorily completed.
Escrow disputes can involve:
- Who owns the funds or securities;
- Who receives investment earnings;
- Whether a contractual default has occurred;
- Whether the owner may draw against the escrow;
- Whether the contractor has completed all required work;
- Whether the escrow agent received proper authorization;
- Whether the correct securities were deposited; and
- When final release should occur.
California Public Works Contractors Can Substitute Securities for Retention
California Public Contract Code Section 22300 provides an important option for contractors performing work for public agencies.
Public agency bid invitations and contract documents generally must include provisions permitting contractors to substitute qualifying securities for money that otherwise would be withheld as retention to ensure performance.
At the contractor’s request and expense, securities with a value equivalent to the withheld amount may be deposited with the public agency or with a qualifying bank serving as escrow agent. The retained cash can then be paid to the contractor while the securities remain as performance security.
Upon satisfactory completion of the contract, the securities are generally returned to the contractor.
Retention May Also Be Paid Directly Into Escrow
Section 22300 provides an alternative structure under which the contractor may request that earned retention be paid directly to an escrow agent.
The contractor may direct investment of the escrowed payments into qualifying securities and generally receives the resulting interest subject to the statutory arrangement.
When the contract is satisfactorily completed, the contractor generally receives the securities, interest, and payments held through the escrow arrangement, subject to escrow fees and applicable contract requirements.
This structure can allow the owner to retain financial protection while reducing the economic impact that non-interest-bearing retention can otherwise impose on the contractor.
Not Every Security Can Be Used for Retention Substitution
Section 22300 identifies qualifying categories of securities and also allows certain other securities when mutually agreed upon by the contractor and public agency.
Potential instruments can include qualifying government securities, certificates of deposit, specified interest-bearing accounts, standby letters of credit, and other mutually accepted security.
The market value of substituted securities generally must be sufficient to cover the cash retention they replace.
Disputes can develop if:
- The proposed security does not satisfy statutory requirements;
- The public entity challenges its value;
- The security declines in value;
- The documentation is incomplete;
- The escrow institution does not qualify; or
- The parties disagree over administrative expenses.
The Contractor Generally Remains the Beneficial Owner of Substituted Securities
Under the statutory public works escrow procedure, the contractor generally remains the beneficial owner of securities substituted for retained cash and receives interest earned on those securities.
This distinction can become important when the parties dispute whether the public agency actually owns the escrowed assets.
The owner’s interest generally concerns the security available to protect contractual performance rather than an unrestricted ownership interest in the contractor’s property.
Public Works Escrow Agreements Must Follow the Statutory Framework
Public Contract Code Section 22300 provides a detailed statutory escrow agreement form. An agreement used for the statutory retention substitution process generally must be substantially similar to the prescribed form.
The agreement addresses issues such as:
- Deposit of securities;
- Payment of retention proceeds;
- Ownership of investment earnings;
- Escrow expenses;
- Withdrawal procedures;
- Owner rights after contractor default;
- Final release of securities;
- Authorized representatives; and
- Responsibilities of the escrow agent.
Using inconsistent escrow language can create disputes over whether the arrangement satisfies the statutory requirements.
Owner Draws Against Escrow Can Lead to Litigation
The statutory public works escrow form allows the owner to draw upon securities in the event of contractor default, subject to specified notice procedures.
This can become highly contested when the contractor disputes whether a default actually occurred.
Potential disputes may involve:
- Defective work;
- Failure to complete;
- Schedule default;
- Termination;
- Failure to satisfy contractual obligations;
- Whether required notice was provided; and
- Whether the amount drawn exceeded the owner’s legitimate claim.
An escrow dispute may therefore proceed alongside broader construction litigation concerning whether the contractor actually breached the underlying contract.
The Escrow Agent Generally Relies on Required Written Instructions
An escrow agent is usually not expected to adjudicate the merits of the construction dispute itself.
The statutory escrow framework relies heavily on written notices and authorizations from the owner and contractor.
Accordingly, litigation may focus less on whether the escrow agent independently determined which party was correct and more on whether the required contractual and statutory instructions were provided before funds or securities were released.
Businesses entering an escrow arrangement should understand precisely who has authority to issue those instructions.
Subcontractors May Also Obtain Benefits From Public Works Retention Alternatives
Public Contract Code Section 22300 contains protections relevant to qualifying subcontractors.
If a contractor elects to receive interest on retention withheld by a public agency, specified subcontractors may be entitled to a similar option concerning retention withheld from them, subject to statutory requirements and applicable administrative costs.
Where the contractor substitutes securities for retention, a qualifying subcontractor may, by mutual consent, also substitute securities in exchange for release of retention held by the contractor.
The statutory subcontractor provisions apply only in specified circumstances, including requirements related to the subcontractor’s share of the contractor’s total bid.
Escrow Is Not a Substitute for Resolving Underlying Performance Problems
Moving retention into escrow changes where the security is held, but it does not eliminate legitimate disputes concerning contract performance.
The parties may still disagree about:
- Completion;
- Defects;
- Backcharges;
- Change orders;
- Delay claims;
- Contract termination;
- Warranty work; and
- Final acceptance.
The existence of an escrow account therefore does not mean the contractor automatically receives unrestricted access to the funds at the end of construction.
Release remains subject to the governing agreement and applicable law.
Certain Large Private Projects Have Separate Security Requirements
California Civil Code also contains a separate security framework for certain large private works of improvement.
Under Civil Code Section 8700, the statutory chapter generally applies when an owner of a fee interest contracts for qualifying work with a contract price greater than $5 million or when an owner of a less-than-fee interest contracts for qualifying work with a contract price greater than $1 million, subject to statutory definitions and exclusions.
Certain projects, including specified single-family residential work and qualifying density-bonus housing developments, are excluded from that particular chapter.
The large-project security statutes should not be confused with the ordinary retention prompt payment rules that apply more broadly to private construction.
A Construction Security Escrow Account May Be Used on Covered Large Private Projects
For projects governed by California’s large private project security statutes, one permitted security structure is a construction security escrow account.
The account must comply with statutory requirements concerning its designation, location, escrow agent, deposits, and disbursements.
Under Civil Code Section 8728, specified owners may be required to make an initial deposit based on a percentage of the contract price when this escrow method is used.
If the contract permits retention from periodic payments to the direct contractor, the amount withheld as retention generally must also be deposited into the construction security escrow account when the corresponding progress payment is made.
This framework is specialized and should be evaluated separately from public works retention substitution under Public Contract Code Section 22300.
Completion Dates Can Become a Major Source of Retainage Litigation
Many retention deadlines begin running from legal completion, making the completion date extremely important.
Parties may disagree about whether completion occurred when:
- The owner began occupying the project;
- Substantial completion was certified;
- A notice of completion was recorded;
- The public entity formally accepted the work;
- Only punch-list work remained;
- A portion of the project was accepted separately; or
- Construction activity ceased.
The contract’s definition of substantial completion may not always be identical to the statutory event that triggers a particular prompt payment obligation.
The parties should therefore evaluate statutory and contractual completion separately.
Punch-List Work Does Not Always Justify Holding All Retention
Owners frequently continue withholding retention because some punch-list items remain unfinished.
A legitimate dispute over incomplete work may support withholding, but the amount should be evaluated in relation to the reasonable value of the disputed work and applicable statutory limitations.
Potential evidence may include:
- The punch list;
- Estimated correction costs;
- Completion schedules;
- Inspection reports;
- Photographs;
- Contractor proposals;
- Third-party repair estimates; and
- Notices showing when corrective work was completed.
Holding a substantial retention balance because of relatively minor work can create additional prompt payment exposure if the withholding exceeds what applicable law permits.
Defective Work Can Support Retention When Properly Documented
Retention may serve its intended purpose when the payer genuinely needs security for defective or nonconforming work.
An owner or contractor asserting this justification should document:
- The alleged defect;
- The applicable contractual requirement;
- Inspection findings;
- Required corrective work;
- Estimated repair costs;
- Notices provided to the responsible contractor;
- Opportunity to cure where required; and
- Whether corrective work has been accepted.
A general statement that work is defective may be less persuasive than documentation connecting the withheld amount to a specific performance problem.
Backcharges Can Complicate Final Retention Accounting
Backcharges often emerge near project closeout and are frequently deducted from retention.
Potential backcharges may involve:
- Corrective work;
- Cleanup;
- Damage caused to other trades;
- Supplemental labor;
- Equipment costs;
- Schedule impacts;
- Testing;
- Reinspection; and
- Completion by replacement contractors.
Subcontractors may challenge those deductions by arguing that the costs are unsupported, excessive, unrelated to their work, or imposed without required notice.
Final retention accounting should therefore identify each deduction rather than presenting only an unexplained reduced balance.
Unresolved Change Orders Do Not Automatically Justify Retention Withholding
One of the most important issues in retention litigation is whether the payer is withholding undisputed retention because a separate change-order claim remains unresolved.
A subcontractor may contend that it is owed additional money for extra work, while the contractor denies that additional amount. That disagreement does not necessarily justify delaying retention that both parties otherwise agree is owed.
The parties should separately identify:
- Undisputed base contract amounts;
- Retention already earned;
- Approved change orders;
- Disputed change orders;
- Backcharges;
- Pending extras; and
- Other claims.
Separating these categories can prevent an unrelated payment dispute from being used to hold funds beyond the statutory retention period.
Liens and Stop Payment Notices Can Affect Retention Decisions
An owner or contractor may face payment demands from subcontractors or suppliers even after paying substantial project funds upstream.
Mechanics liens, stop payment notices, and similar claims can create potential double-payment exposure.
A payer may therefore have a legitimate interest in protecting funds associated with those claims, depending on the circumstances and applicable statutory framework.
Relevant evidence may include:
- Preliminary notices;
- Mechanics liens;
- Stop payment notices;
- Payment bond claims;
- Conditional and unconditional releases;
- Subcontractor payment records; and
- Evidence that disputed lower-tier amounts have been resolved.
However, the existence of one claimant does not necessarily justify withholding unrelated amounts from every contractor on the project.
Contractual Closeout Requirements Can Affect Final Payment
Construction contracts commonly require specific closeout materials before final payment is due.
These may include:
- Warranties;
- Operation and maintenance manuals;
- As-built drawings;
- Record drawings;
- Final lien releases;
- Consent of surety;
- Testing documentation;
- Commissioning records;
- Training materials;
- Certificates;
- Permits; and
- Other project-specific records.
A dispute may develop over whether missing paperwork constitutes a valid contractual precondition to release of retention and, if so, how much money can reasonably remain withheld.
Surety Consent Can Become Relevant to Final Retention
On bonded projects, the owner may require consent from the performance bond surety before making final payment or releasing substantial retention.
The surety may evaluate whether unresolved claims or potential contractor defaults remain before issuing consent.
However, a surety’s involvement should be analyzed separately from statutory prompt payment obligations. A contract provision requiring surety consent does not necessarily authorize indefinite withholding if all legal conditions for payment have otherwise been satisfied.
Partial Release of Retention Can Reduce Disputes
Some projects allow retention to be reduced or released as portions of the work are completed.
Partial release may be useful when:
- A major subcontractor’s work is fully complete;
- A separable phase has been accepted;
- Remaining work is limited;
- The original retention materially exceeds remaining project risk; or
- The parties agree to substitute other security.
Whether partial release is required or discretionary depends on applicable law, the contract, project type, and facts.
Retention Disputes Should Be Supported by Detailed Accounting
Both the paying party and the claimant should be able to reconstruct the retention history.
Important records may include:
- Original contract value;
- Approved change orders;
- Progress payment applications;
- Retention percentages;
- Amounts actually withheld;
- Amounts released;
- Owner payments;
- Subcontractor payments;
- Escrow deposits;
- Investment earnings;
- Backcharges;
- Disputed amounts; and
- Final balance calculations.
A dispute can become much harder to resolve when accounting records do not clearly distinguish retention from unrelated offsets or unpaid contract amounts.
Escrow Records Can Be Critical Evidence
When retention has been deposited into escrow or replaced with securities, parties should preserve documentation showing the entire history of the account.
Relevant materials may include:
- The escrow agreement;
- Deposit confirmations;
- Security valuations;
- Investment instructions;
- Interest statements;
- Escrow fees;
- Owner notices;
- Contractor notices;
- Default notices;
- Withdrawal authorizations;
- Final completion certifications; and
- Disbursement records.
These documents can determine whether the escrow agent acted according to the parties’ instructions and whether an owner or contractor had authority to obtain the disputed funds.
Contract Termination Can Intensify Escrow and Retention Conflicts
If a contractor is terminated before completion, the owner may attempt to retain or draw upon security to fund completion and correction costs.
The contractor may respond that the termination was wrongful, that no contractual default existed, or that the amount claimed greatly exceeds legitimate completion costs.
Potential issues may include:
- Whether termination was for cause or convenience;
- Whether contractual cure procedures were followed;
- Cost to complete the remaining work;
- Corrective work;
- Unpaid earned contract amounts;
- Owner backcharges;
- Escrow draw procedures;
- Surety involvement; and
- Final accounting.
The escrow dispute may therefore become one component of broader termination litigation.
Subcontractor Default Can Affect Downstream Retention
A general contractor may seek to retain money when a subcontractor abandons the project, fails to correct defective work, or otherwise defaults.
The contractor may incur costs for:
- Replacement subcontractors;
- Completion labor;
- Corrective work;
- Additional supervision;
- Equipment;
- Schedule recovery; and
- Other direct consequences of the default.
The subcontractor may challenge whether a default occurred or whether the claimed completion costs are reasonable.
Retention can provide security during this dispute, but the contractor should maintain detailed records connecting the retained amount to legitimate contract claims.
Negotiations Do Not Necessarily Extend Payment Deadlines
Construction parties often continue negotiating final change orders, punch-list work, and closeout issues while retention remains unpaid.
Those negotiations do not necessarily suspend statutory prompt payment obligations.
A contractor or subcontractor should separately track:
- Statutory retention deadlines;
- Contractual claim deadlines;
- Mechanics lien deadlines;
- Stop payment notice rights;
- Payment bond deadlines;
- Government claim requirements where applicable; and
- Arbitration or litigation deadlines.
Continuing commercial discussions should not be treated as a substitute for preserving legal remedies.
Breach of Contract Claims May Accompany Statutory Retention Claims
A party whose retention is wrongfully withheld may have both statutory and contractual theories of recovery.
A breach of contract claim may involve:
- Failure to make final payment;
- Improper withholding;
- Failure to comply with an escrow agreement;
- Unsupported backcharges;
- Failure to release security;
- Breach of closeout obligations; or
- Failure to follow dispute-resolution procedures.
The contract may also contain independent provisions concerning interest, attorney’s fees, mediation, arbitration, venue, or other remedies.
Mechanics Liens and Bond Claims May Provide Additional Leverage
A retention dispute should not be analyzed solely as an ordinary debt collection matter.
On qualifying private projects, contractors and subcontractors may have mechanics lien or stop payment notice rights if applicable statutory procedures are satisfied.
On public projects, subcontractors and suppliers may have remedies involving stop payment notices and payment bonds.
These remedies contain strict notice and enforcement requirements, and payment negotiations do not necessarily extend those deadlines.
Contractors should therefore preserve statutory remedies while attempting to resolve the retention dispute commercially.
Parties Should Separate Undisputed Retention From Disputed Claims
One of the most effective ways to reduce litigation risk is to create a written reconciliation distinguishing money that is genuinely disputed from money both parties agree has been earned.
The reconciliation may identify:
- Total retention withheld;
- Undisputed retention;
- Retention associated with incomplete work;
- Retention associated with defective work;
- Liens or payment claims;
- Backcharges;
- Escrowed amounts;
- Previously released funds; and
- Remaining balance.
Releasing undisputed amounts while preserving legitimate disputed funds can reduce penalty exposure and narrow the issues requiring litigation.
Did You Know?
On many California public works projects, contractors can elect to substitute qualifying securities for cash retention under Public Contract Code Section 22300, allowing retained cash to be released while equivalent security remains available to protect the public agency’s performance interests.
Resolving Retainage and Construction Escrow Conflicts
Retainage and escrow disputes can involve statutory payment deadlines, completion dates, defective work, backcharges, lien claims, security substitution, escrow instructions, contractor defaults, and questions concerning how much money can lawfully remain withheld. Effective resolution generally requires both a detailed financial accounting and careful review of the construction contract, project type, escrow documents, and applicable California payment statutes.
Putterman Law represents owners, contractors, subcontractors, developers, and other construction businesses in disputes involving retainage, construction escrow, final payment, project closeout, contract claims, public works, and related construction litigation.
Learn more about construction law services at Putterman Law
FAQs
How long can an owner hold retention on a California private construction project?
California Civil Code Section 8812 generally requires an owner that has withheld retention from a direct contractor to release it within 45 days after completion of the work of improvement. A qualifying good-faith dispute can permit limited withholding, generally up to 150 percent of the disputed amount.
How quickly must a California contractor pay subcontractor retention on a private project?
A direct contractor generally must pay each subcontractor’s share of retention within 10 days after receiving the applicable retention payment from the owner, subject to permitted withholding for a qualifying good-faith dispute.
When must retention be released on a California public works project?
Public Contract Code Section 7107 generally requires a public entity to release retention within 60 days after completion of the work of improvement. Once the original contractor receives retention, it generally must distribute each subcontractor’s share within seven days, subject to qualifying disputes.
How much retention can generally be withheld on a California public works project?
Public Contract Code Section 7201 generally limits retention on covered public works projects to 5 percent, including downstream retention, although statutory exceptions can permit a higher percentage on certain substantially complex projects and in specified bonding circumstances.
Can a contractor withhold all retention because there is a separate change-order dispute?
Not necessarily. California prompt payment law limits withholding associated with retention disputes, and California authority generally requires a meaningful connection between the dispute and the specific payment being withheld. An unrelated claim for additional compensation may not justify holding retention that is otherwise undisputed.
What penalties can apply when retention is wrongfully withheld?
California private and public construction statutes can impose a charge or penalty of 2 percent per month on qualifying amounts wrongfully withheld. Applicable statutes may also permit the prevailing party in a collection action to recover reasonable attorney’s fees and costs.
Can a public works contractor replace cash retention with securities?
Generally, yes. Public Contract Code Section 22300 provides a statutory process through which contractors on qualifying public agency contracts may substitute specified securities for retained cash or request that retention be paid into an escrow arrangement, subject to statutory requirements and expenses.
Who receives interest earned on securities substituted for public works retention?
Under the Section 22300 statutory arrangement, the contractor generally remains the beneficial owner of the substituted securities and receives the interest earned, subject to the terms of the escrow arrangement and applicable expenses.
Can an owner take money or securities from a construction escrow after alleging contractor default?
Potentially, depending on the applicable escrow agreement and statutory framework. California’s statutory public works escrow form contains procedures allowing an owner to draw upon securities in the event of default after specified notice. Whether a legitimate default exists may still become the subject of separate construction litigation.
What records are important in a retainage or escrow dispute?
Important records can include the prime contract, subcontract, payment applications, retention calculations, escrow agreement, security deposits, investment statements, change orders, backcharges, punch lists, inspection reports, completion notices, lien releases, owner payments, subcontractor payments, and communications concerning disputed work and release of funds.
