Late last year, New York passed a law that Legislators say will “reduce delays occurring in the release of retainage on private construction jobs.” The two features of the new retainage law are (1) a 5% cap on retainage for many commercial projects, and (2) authorization for contractors to bill for retainage when the work is substantially complete, rather than waiting until final completion of the contract. 

The 5% cap will certainly improve cash flow to the contracting community as intended. But the new right to submit a “final invoice” upon substantial completion won’t help anyone. Worse than that, it invites owners to seek contract changes that, if not carefully negotiated, may create confusion in other important aspects of the contracting relationship.          

Both new provisions affect commercial construction contracts signed after November 17, 2023. They amend New York’s Prompt Pay Act, which applies only to private projects of more than $150,000. They don’t apply to public work or to smaller residential projects, including subdivisions with under 100 houses and affordable housing projects with fewer than 75 units.  

The Retainage Cap

 This piece is simple. Previously, the only legal limitation on the amount of retainage commercial owners could withhold was that it be “reasonable.” Ten percent was typical, but legally it could have been more. Now, though “an owner may retain no more than five per centum of the contract sum as retainage.” Similarly, “a contractor or subcontractor may also retain no more than five per centum for retainage and in no case shall retainage exceed the actual percentage retained by the owner.” It remains the law that a contractor who has received retainage from an owner must release “a proportionate amount” to its subcontractors and other vendors from which retainage has been withheld.

This new 5% limitation doesn’t necessarily mean that every progress payment must be for 95% of the value of work completed, although that will likely be the most common result. On its face the new law will permit an owner to hold more retainage at the beginning of a job and less retainage later — for example, 10% retainage until the work is 50% complete, and no further retainage thereafter – as long as the total withheld doesn’t exceed 5% of the total contract sum. Except for the overall 5% cap, though, any contract retainage term is subject to negotiation between the owner and the contractor.

As noted, the new 5% cap applies to subcontracts, too. In this regard, the prudent contractor will make sure that subcontract retainage matches what is provided its the prime contract with the owner. 

Submitting Final Invoices

The Prompt Payment Act now permits a contractor “to submit a final invoice for payment in full upon reaching substantial completion, as such term is defined in the contract or as it is contemplated by the terms of the contract.” This replaced language that only permitted a final invoice “upon performance of all the contractor’s obligations under the contract.” Despite what the drafters of this law intended it will do nothing to speed up release of retainage to anyone. Worse still, it will likely lead to confusion or conflict in other aspects of the relationship between owner and contractor.

First, this permission to submit a final invoice upon substantial completion applies only to contractors. It does nothing for subcontractors. Subs who substantially complete their work early in a project will still have to wait until the project is finally complete to have their retainage released, unless they are able to negotiate something different in their subcontract. Second, the new law only advances the time when a contractor may invoice for final payment. It doesn’t change when the owner must make final payment, which the law still fixes as 30 days after “final approval of the work” (§ 756-c) and “approval” of the invoice (§ 756-a[3]). 

This is not to say that project owners may safely ignore a “final invoice” submitted at substantial completion. Unless the contract says otherwise, an owner has only 12 business days to disapprove a payment application in whole or in part, whether because invoiced work is not complete or for some other reason permitted by law. (As noted, the 12-day deadline can be extended by the contract.) The owner may then hold back enough retainage to cover the cost to the owner of completing any unfinished, incomplete or defective work.     

Thus, this new permission to submit a final invoice upon substantial completion has no practical value to the contracting community. The current practice of billing for everything except retainage upon substantial completion, and then invoicing periodically for release of retainage as items of punch list work are finished, serves the industry well. Other terms in the Prompt Pay Act offer protections against abuses of this process, such as excessive withholdings or disapprovals made in bad faith. The new law adds nothing helpful to the process.  

What’s worse is that the new law incents owners and their attorneys to redefine “substantial completion” in their contracts so that it doesn’t occur until all contract obligations have been completed. (We’ve already seen this on one recent project.) The intent behind re-defining “substantial completion” in this way is to shield the owner from having to deal with applications for final payment before all contract obligations have been fulfilled. But this “solution” creates new problems, because in most contracts “substantial completion” marks the transition point for many other project obligations. 

Almost universally, substantial completion is defined as that stage of the work when the owner can take beneficial occupancy of the building or other structure being built or renovated. This is how it’s defined in the standard contract documents published by both the American Institute of Architects (AIA) and the Engineers Joint Contract Documents Committee (EJCDC). For most contracts, substantial completion marks the contractor’s “delivery” of the project to the owner, ending the contractor’s exposure to liquidated or other delay damages. It also typically marks the end of the contractor’s obligation to secure and maintain the project, to pay for temporary utilities and to assume presumptive responsibility for damage to the structure. It is also the usual point at which warranty obligations begin and builders risk insurance coverage ceases. 

Monkeying with the contract language to postpone “substantial completion” to a time that corresponds with final completion is almost certain to introduce uncertainty respecting these other important contract issues. And it’s not necessary to achieve the goal of postponing final contractor invoices. 

As discussed above, a project owner can deal with a premature “final” invoice by simply rejecting it, in whole or in part; and if 12 business days gives the owner insufficient time the owner is free to negotiate for a longer time in the contract. But if an owner insists on changing the contract definition of substantial completion to prevent a premature final invoice, the contractor can head off other problems by asking for language limiting the application of that definition to that purpose only – that is, fixing the earliest date for a final invoice — and for no other purpose. The simplest solution of all may be to just add a sentence to the “final payment” section of the owner’s contract to say: “These procedures supersede any other procedures provided by law for submission of a final invoice.”  

Take-Aways

Boiled down, there are three: 

1. Owners on most private commercial projects in New York may no longer require retainage exceeding 5% of the contract price. Neither can contractors, who may withhold no more than the owner does. Violations may be subject to all the remedies provided in the Prompt Pay Act, including suspending of work and 12% interest.

2. Contractors must be alert for owner proposals that change the definition of substantial completion, or that otherwise alter customary billing practices. 

3. As with so many issues in construction, an ounce of prevention at the front end is worth several pounds of cure once the contract is signed and the work has begun.

Anthony J. Adams, Jr. is a founding partner with the law firm of Adams Leclair LLP.  He focuses his practice on construction law and litigation.  He can be reached at aadams@admasleclair.law.