General Assembly rewrites law on public contract retainage

On July 31, 2007 the North Carolina General Assembly ratified Senate Bill 1245 (A Act to Amend the Laws Relating to Retainage Payments on Public Construction Contracts), which will significantly change the law of public construction in North Carolina. The legislation will become effective on January 1, 2008.

New Requirements For Retainage

The legislation divides public construction projects into two types: (1) projects where the total project costs are less than $100,000.00, and (2) projects where the total project costs are equal to or greater than $100,000.00. No retainage may be held on projects less than $100,000.00. With regard to the larger projects, retainage is still allowed, but will now be subject to statutory requirements. The most important statutory rules, generally, are that: (1) no more than 5% retainage may be withheld from any payment, and (2) no further retainage may be withheld when the project is 50% complete.

A project is deemed 50% complete when the contractor’s gross project invoices, excluding the value of materials stored offsite, equal or exceeds 50% of the value of the contract. There are four general exceptions to the rule disallowing retainage after the 50% completion mark: (1) Where the contractor is not performing satisfactorily (retainage may continue up to a maximum of 5% per payment; (2) Where any nonconforming work has been identified in writing prior to the 50% completion point, but such work has not been corrected by the contractor and accepted by the owner, architect or engineer, (retainage my continue up to a maximum of 5% per payment); (3) Where there is disputed work, or if there is a third-party claim filed against the owner, or if there is reasonable evidence that a third-party claim will be filed; and (4) the owner is entitled to retain a collective 2.5% retainage until completion of the project and may therefore continue withholding retainage past the 50% completion point, not to exceed 5% per payment in order to maintain this right.

With respect to subcontractors, the prime contractor may not withhold a greater percent of retainage from a subcontractor than the owner is withholding from the prime contractor.

As a general rule, the owner with written consent of the contractor’s surety must release all retainage being withheld from the prime contractor within 60 days after the submission of a payment request by that contractor if the owner receives a certificate of substantial completion or beneficial occupancy or use of the project.

The new law becomes effective January 1, 2008 and applies to contracts entered into on or after that date. If there are projects bid near the end of 2007, contractors will enjoy the benefits of the new law if such contracts are not executed until after December 31, 2007.

Construction Law Practice Group

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