by John McGill
Retention is a common enough provision in construction contracts that it needs little introduction. It’s the percentage amount that the Owner holds back from the General’s progress payment and that the General holds back from the subcontractor’s progress payment. The basis for the withhold is to assure the Owner that there is something left of the construction fund to cover any incomplete or improperly performed work. Likewise, the General wants to have enough of the subcontractor’s funds to cover any incomplete or deficient work. All very elementary and nothing special- but there are some issues that come up.
For example, in public works the Owner can only withhold up to 5% of the progress payment. The General on public works project can only hold retention in the amount that the Owner holds; if the Owner holds 5%, the General can only hold 5%.
There is an exception in the public works arena that allows the General to hold more than the Owner holds. If the General includes in its advertisements for subcontractor bids a requirement that the subcontractor must be able to bond their work, and provided the General includes the particulars of the bond that is required, then if that bond is not or cannot be provided, the General is permitted to withhold additional retention. This is justified as protection for the General in the event the subcontractor defaults. (PCC §§4108, 7200) If the bond is provided, then the amount of withheld retention cannot exceed the Owner’s retention.
This is not the case on private works projects. A General is not limited to the amount that the Owner retains. The General can retain whatever it wants, provided of course that amount is identified in the contract. Remember, retention is a contract condition and if it is not included in the agreement, then it cannot be withheld. If you want it, include it in the terms and conditions.
When must retention be released is the more interesting issue; when is it due and what happens if it is not paid out? Retention often represents a contractor’s profit on a project and so obtaining those withheld funds as soon as possible is important. Under what circumstances can the Owner withhold retention, likewise when can the General withhold retention, and just what constitutes retention anyway?
Last issue first so we are clear. A retention payment is not a progress payment and the last progress payment is not necessarily a release of retention. The money released for retention must be the money withheld from the progress payments as retention. This is important because if retention is released to the General, then by Code the subcontractor’s retention must be released within 7 days. In public works, the Owner has to release the retention within 60 days of issuing the notice of acceptance. Similarly, in private works, when the Owner releases retention to the General, the General has to release the retention within the statutory period.
Except, there is always an exception, if there is a good faith dispute between the parties that allows the continued withholding of the retention. What constitutes a good faith dispute sufficient to justify the withholding has been the subject of a number of appellate decisions. One that has generated a lot of problems and that is thankfully being ignored in more recent cases is the Martin Brothers case. In that case the court of appeal ruled that a good faith dispute justifying a withhold was change order work; ie- a new money claim.
According to the Martin Brothers court if a subcontractor submitted a claim, then that was sufficient to allow the General to withhold retention. In other words, the fact that the claim, if proved, would require the General to pay additional money, but if it not proved the General would pay nothing, had no significance. The sub’s previously earned money could still be retained and, even more ridiculous, the dispute was determined to be in good faith and therefore the sub could not get its fees or penalties for wrongful withhold of its earned money.
Recent decisions are not applying the Martin Brothers ruling. In United Riggers & Erectors v Coast Iron & Steel, the court ruled that if the dispute had nothing to do with the retention fund, a failure to release retention in the statutory time was wrongful. In United Riggers, Coast the subcontractor submitted a claim for delay costs and outstanding change orders. United withheld the retention based on those claims. The court ruled that because the dispute had nothing to do with retention there was no good faith basis for the withhold.
United Riggers is based on an earlier case- East West Bank v Rio School Dist- where the court ruled that the school district did not have a good faith basis to withhold retention. There the issues between the District and the General had to do with extra costs. The East West Bank case put the good faith dispute issue into its proper context and applied the statute in the way it was expected to be applied; and did not follow Martin Brothers.
In Blois Const. v FCI/Fluor/Parsons the court confronted a related issue. In that case the question was- what retention is due. In Blois, the Owner on a public contract initially withheld 5% retention and the General withheld that same amount from its subcontractors. The Owner eventually determined it would not withhold any further retention and therafter paid all progress payments with no retention withheld. The General paid out the full amount of all subcontractor progress payments from that point forward.
Blois, one of the subcontractors, insisted that it was due all of its previously held retention because the Owner was no longer holding retention. The court disagreed. Because the Owner had not released the previously withheld retention amounts to the General, there was no obligation to pay any retention to the subs, therefore, no wrongful withhold. The Code specifically states that when the General receives retention from the Owner, then and only then is it required to pay out retention; and that never happened.
Retention must be released within the statutory timeframes and when it is released, the General must pay it out to its subcontractors, unless there is a good faith dispute. The good faith dispute however must relate to the retention, not other ancillary issues. If the dispute is over change order work or something other than contract work not performed, and retention is not released, then it is a wrongful withhold and penalties can attach.
Bio: John P. McGill is an attorney representing contractors and suppliers throughout the Bay Area and Northern California in both private and public work disputes, employment, transactional, and administrative matters. He received his JD with distinction from the University of the Pacific, McGeorge School of Law, and is a member of the Traynor Honor Society. He is the author of California Contractor’s DESKTOP GENERAL COUNSEL What You Need To Know About California Construction Law. Contact: Work - 925-952 5403 or Cell- 707-337-1932.
johnmcgill310@gmail.com; jmcgill@archernorris.com
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