2023 5% Cap Amendment

In 2023 Governor Hochul signed into law an amendment to Section 756-c of the New York General Business Law, a section of New York’s Prompt Payment Act, capping the amount of retainage at 5% that may be withheld on a private construction contract of $150,000 or more. While the intention of the legislation was to get contractors and subcontracts paid sooner, the amendment left a glaring loophole that allowed contracting parties to avoid the 5% cap by simply agreeing to a higher rate of retainage in the project contract. 

The loophole came from the general rule within the Prompt Pay Act which states “the terms and conditions of a construction contract shall supersede the provisions of” the Prompt Pay Act. However, Section 757 of the New York General Business Law identifies  specific contract provisions that are deemed to be “void and unenforceable” if included in a construction contract covered by the Prompt Pay Act. Section 757 was created by the legislature to prohibit certain contract provisions that it deemed would unfairly override the protections afforded by the Prompt Pay Act. 

Legislature Closes Loophole

On December 19, 2025, in an effort to close the loophole allowing parties to avoid the 5% retainage cap, Governor Hochul signed an amendment to Section 757 which states that any provision that requires retainage in excess of 5% of the total contract price is now void and unenforceable. 

The 2025 amendment applies to all contracts entered into on or after December 19, 2025, which fall under the Prompt Pay Act including both prime contracts and subcontracts. Thus, any provision in such a contract that calls for retainage of more than 5% of the total contract price will not be enforced by a court. 

Importantly, the 5% cap only applies to the total contract price. Parties are still allowed to set a retainage schedule that calls for more than 5% of retainage from an individual progress payment as long as the entire amount of retainage withheld does not exceed 5% of the total contract price. For example, a retainage provision that requires 10% retainage on the first five of ten progress payments is permitted as long as no retainage is withheld on the final five progress payments. 

Takeaways

The 5% cap may put a damper on the usefulness of retainage as an incentive for contractors and subcontractors to timely and completely perform their work. However, there are other methods like more detailed and strictly enforced project milestones and increased billing discipline that can be utilized to ensure complete and timely performance according to the project schedule. The cap will also increase the amount of cash flowing to general contractors and subcontractors while projects are ongoing, which should help keep everyone on the job funded and prevent delays. 

While many owners, contractors and subcontractors may have been operating as if the 5% retainage cap applied since 2023, the 2025 amendment now gives the cap some bite and all parties to construction contracts would be wise to review their retainage provisions to ensure compliance with the 5% statutory cap. 

John M. Cassidy

Jack Cassidy is an associate with Adams Leclair LLP.  He focuses his practice on construction law and litigation.  He can be reached at  jcassidy@adamsleclair.law