Withholding Less Retainage ≠ Release of Retainage; No Prompt Pay Act Violation

Sometimes a construction contract allows for the amount of retainage being withheld by the owner to reduce, once the project is more than half complete. For instance, retainage that starts at 10% may reduce, at the halfway mark, to 5% being withheld thereafter. A California appellate court has held that this reduction in the amount of retainage being withheld is not the equivalent of release of retainage. And the prime contractor’s failure to release retainage to subs, during this portion of the project, did not run afoul of the California prompt pay law.

The California law requires a contractor who has received retainage from a public owner to release that retainage to subs, in turn, within seven days, or be subject to late payment penalties.

On a light rail project in the LA area, the prime contract called for 10% retainage. It also allowed for withholding of retainage to cease once the project was 50% complete, such that retainage at the end of the project would effectively be 5%. After the midway point, the public authority started paying each requisition in full, and not withholding any further retainage. A subcontractor subsequently sued the prime contractor, claiming that it had not been paid retainage after the owner’s payment to the prime, and claiming entitlement to penalties under the CA prompt pay law.

But the trial court, and then the appellate court, disagreed with the sub. The court held that, when the public authority began paying requisitions for the full amount, “it was not paying funds previously withheld. Rather, in its progress payments, it paid [the prime] the total amount then due without holding a retention. Because no funds were withheld or paid as retentions, [the prompt pay law] did not apply to these payments.” The case is Blois Construction, Inc. v. FCI/Fluor/Parsons, 2016 Cal. App. LEXIS 215 (Mar. 23, 2016). Given the prevalence of prompt pay laws in many states, this decision draws a critical distinction between reduction in amounts being withheld going forward, and release of retainage previously withheld.