A lawyer discusses retainage and the importance of a legal presence when drafting contracts

When an owner negotiates a price with a contractor for a renovation or construction project, they typically want to be able to hold back some money from each payment they make to the contractor as security to ensure that the contractor completes the work. In other words, they want him to have a financial incentive to be there until the end of the project. This money is called "retainage," ie. it is "retained" until the end of the project. As the project continues, the retainage accumulates until it is a rather sizeable sum of money. The issue then becomes when is the contractor entitled to it? The milestone time period for when this issue comes up is when substantial completion occurs on the project. Substantial completion is basically when the project is just about done. It is not completely done. Rather, it is completed to the point where people can occupy the space while the final work is being completed. The problems that arise at this point in the project are because the contractor may want to declare that substantial completion has been achieved, when the owner and the owner's architect do not agree. Why would they disagree about this? Well, this milestone may be the point at which the contractor may be allowed to get back some of the retainage which has been held. The owner may feel that more work needs to be done and that they want the security of having that retainage in place just in case. Retainage is not something that a contractor usually wants to have in their contract. It is something which an owner requests and has drafted into a contract. Therefore, when an owner asks a contractor to prepare a contract for a project, this is something which may be missing from the contract presented. The milestones which have to be achieved before the retainage is paid out is also something that a contractor will feel differently about than the owner. This is why it is best for the owner to have their legal counsel draft the contract with the contractor. I find that when my clients do that, the negotiations go better and the project starts out on a clearer basis. There are a number of things that owners want to be sure about before they start paying back the retainage to the contractor. For starters, they want to be sure that they know who all the subcontractors and suppliers are and that they have been paid. This is where waivers of mechanic's liens and affidavits become so important. The owner wants to be as sure as he can be that everyone who needs to be paid by the contractor has been paid. On larger commercial or governmental projects, title searches are often done before each payment is made to ensure that no one has filed a mechanic's lien. Next, there are various inspections by governmental authorities which need to occur. The owner wants to be certain that they have occurred and that they have been successfully passed. For example, projects get bogged down with fire safety issues which need to be cleared before the inspection will be passed. Sometimes getting a temporary Certificate of Occupancy and ultimately a final Certificate of Occupancy is the issue. This comes up often on new condominium projects. A temporary Certificate of Occupancy is needed before closings can occur. Having a financial incentive for the contractor to complete the necessary work is important. There can sometimes be as much as a two year period between when the temporary Certificate of Occupancy and the final Certificate of Occupancy are issued. Sometimes it has more to do with governmental authorities than it does with the contractor. This can lead to heated discussions between the contractor and the owner about whether some of the retainage should be released at this point. These issues should not be left open to discussion and debate at the end of the project. They are issues which I always negotiate and draft into the construction contracts at the very beginning of the project. This helps to avoid arguments. When the contractor asks for retainage back, there should be a clause the owner can point to which makes it clear that he is either entitled to it or not entitled to it. This is also a key point in time when clients come to me for advice about how to proceed with winding down and finalizing the project. C. Jaye Berger, Esq., is the principal of Law Offices C. Jaye Berger, Manhattan, N.Y.