Third Party Procurement
Frequently Asked Questions
Q = Question; A = Answer
Q. We are sub-contractors who worked for a company last year that held 10% retainage out of our check every week. We have worked for many of these companies and they routinely retain money in case our work is bad. They looked over our work as we finished every day. The retainage is due now, and they say they are having money problems and will not be paying. What can we do?
A. As to getting paid the money that is owed you, it would be advisable to retain legal counsel. As for future contracts, you might explore the feasibility of other means of security in lieu of retainage; e.g., a warranty bond whose cost could hopefully be passed on to the companies buying your product; a letter of credit from your bank in the amount of the normal retainage, etc. (Reviewed June 2010)
Q. Is it normal industry practice for a prime contractor to release a sub's retention for their completed contract work even if the prime's contract is not over? I work for a transportation agency in the Midwest and a subcontractor to a prime on a construction project has asked for their retention to be released even though the prime's contract is not over. The sub is saying their part of the work is over and waiting for the prime's contract to end puts them in a financial hardship.
A. If this contract is being funded with FTA grant funds, then it must incorporate the requirement at 49 CFR §26.29 that requires prime contractors to pay their subcontractors (all of them, not just DBEs) promptly and return the subcontractors’ retainage within a specific number of days after the sub's work is completed. The Best Practices Procurement Manual (BPPM) discusses this requirement in Section 7.2.4. Industry practice varies greatly, including primes holding subcontractors’ retainage until completion of the overall project. This would especially be true if the subcontractor was furnishing a subsystem that had to be functionally integrated into a larger system and then tested as an integrated system when the project was completed. In this case the prime would be reluctant to pay subcontractors until the owner paid the prime. If this is the situation in your case, you could agree with the prime to release a portion of the retainage for the subcontractor’s work with the understanding that the prime would use it to release the subcontractor’s retainage. (Reviewed June 2010)
Q. Please clarify if the three mechanisms under return of retainage are literal requirements under 49 CFR §26.29. We hold retainage until the end of the project on some construction contracts and do not pay retainage to the prime based on incremental acceptances of portions of the prime contract.
A. The requirements of 49 CFR §26.29 apply to all subcontracts on DOT assisted contracts. FTA realizes this represents a substantial change from the practices of most grantees but FTA cannot change the policy in 49 CFR §26.29. (Reviewed June 2010)
Q. May a grantee release some or all of the retainage held from a contractor before all of the work is done?
A. Your policies with respect to paying contractors, including the issue of releasing retainage, must comply with the general principle stated in FTA Circular 4220.1F that you maintain a contract administration system that ensures that contractors perform in accordance with the terms, conditions, and specifications of their contracts."
Retainage has been one of the primary means that agencies have used to ensure that contractors are motivated to complete their contracts. As long as you do not remove this incentive to complete the work by prematurely releasing too much of the retainage, you are free to use your judgment to do what is equitable under the circumstances for both you and your contractor. The Best Practices Procurement Manual (BPPM) has some worthwhile guidance on the subject of retainage and how much that amount should be in relation to the unfinished work. The topic is discussed in Section 10.1 - "Closeout Procedures," and in the paragraph entitled "Retainage and the problem of contractors who quit work." This discussion regards construction contracts but the principles and the issues would be applicable to other contracting situations as well. The suggested "Best Practice" in the BPPM is based on the policies of MARTA. That agency initially sets the amount of retainage at 5% of the total contract value and then reviews the work carefully at the point of final inspection and punch list preparation. The resident engineer estimates the value of the punch list items and the undelivered items such as spares, manuals, warranties, etc., and then MARTA pays out the retainage minus twice the amount of money it takes to finish the work. This procedure motivates the contractor to finish the work because the payment will be twice the amount of the contractor's cost to finish the work, and therefore profitable. (Revised June 2010)
Q. We are in the process of finalizing our contract on a job that has FTA money where we will be a subcontractor working for a contractor who will be working for the general contractor who will be working for the Utah Transportation Authority. There will be no retention withheld all the way down the line until it gets to us where the contractor we are working for wants to hold 5 percent. Would this be something that by law or policy they could do? If they can do it, would there be any limitations?
A. Your contractor may require retainage in order to ensure complete performance of your subcontract. The amount of the retainage and the length of time it may be held are subject to negotiation. However, we would also note that FTA has a Prompt Payment requirement (including retainage) that applies to all grantee contracts. You may read this policy in the FTA Best Practices Procurement Manual (BPPM). (Reviewed June 2010)
Q. I need something in writing explaining the policy of retainage on federal jobs. I understand that retainage is not allowed.
A. We will address your question in two parts. First, with respect to construction contracts awarded by FTA grantees (these are not direct Federal contracts): When FTA grant funds are being used by a grantee, the grantee construction contract must contain a clause requiring the contractor to comply with the DOT Disadvantaged Business Enterprise (DBE) rule in 49 CFR Part 26. That rule is discussed in the FTA Best Practices Procurement Manual (BPPM), Chapter 7. Section 7.2.4 of the BPPM, discusses the requirement that contractors make prompt payments to their subcontractors, including the return of retainage within 30 days of satisfactory completion of work. As you will see, there is no prohibition of retainage on FTA funded contracts, only a requirement to release the retainage promptly when work is complete.
As far as direct Federal construction contracts are concerned, there is a similar requirement regarding retainage. There is not a prohibition on retainage, only a requirement that it be released within 30 days of satisfactory completion of work. The Federal contract requirements are contained in the Federal Acquisition Regulation (FAR), Part 32.904 "Determining Payment Due Dates," paragraph (d) "Construction Contracts," which may be found online. (Posted: October, 2010)
Q. A Grantee's contractor is requesting to deposit securities in lieu of 10% retainage in the contract. Securities would be held and withdrawn through a 3rd party escrow account established at a local bank. Contract states that the escrow account securities deposited will be amended by the contractor based upon the market value of securities. Is this allowable? References that apply?
A. FTA has no explicit policy in its Procurement Circular 4220.1F concerning the issue of what would represent a prudent amount of retainage or what form the retainage might take. Thus if the grantee and contractor agree to protect the grantee's interests by depositing securities in lieu of the grantee withholding a portion of the contract payments otherwise due the contractor, FTA would not (on a policy basis) object. However, the grantee should carefully establish (1) the authenticity of the securities; (2) their current market value; and (3) the liquidity of the securities, before agreeing to accept this method of retainage. (Posted: January, 2012)
Q. As a sub-contractor we have many projects that take 5% retainage. Our small jobs are usually completed in a short amount of time but it can be several years before we receive the retainage from the prime if ever. What are our rights to collecting that retainage? Do we have to wait until the prime contract is complete or can we demand payment after a reasonable amount of time?
A. You should direct this question to your corporate legal counsel. In addition, the terms and conditions of your contract should spell out the retainage pay schedule. (Posted: December, 2013)