Retention Reduction on State and Local Public Projects in Effect
August 15, 2013
Starting on July 1, 2013, a revision to Section 17-110 of the State Finance and Procurement Article will effectively reduce the amount of retention that a public body in the State of Maryland can withhold from prime contractors on projects that are 100% bonded. Prior to the change in the statute, a State or local government on such projects could withhold “10% of the total amount [of the contract value] for the first 50% of the contract”. As a result of the change, State and local governments may now only withhold “5% of the total amount of the contract” starting from the beginning of the project. By making this change in the statute, the General Assembly has permitted contractors and subcontractors to obtain payment for a larger percentage of the work that is invoiced, rather than force contractors and subcontractors to wait until the midway point of the contract for a reduction in the retention. It is important to mention that this change is to apply prospectively, and will not impact contracts that were awarded prior to July 1, 2013.
The General Assembly kept the remaining provisions of the statute intact. Thus, there is an exception to the general rule concerning the amount of retention that can be withheld, which provides, “[i]n addition to retainage, a public body may withhold from payments otherwise due a contractor any amount that the public body reasonably believes necessary to protect the public body’s interest.” In other words, if the State or local government has a good faith basis to withhold more than 5% in retention to protect the public against damages such as delays to substantial completion, the revised version of the statute still permits the public body to exercise discretion to withhold more than the statutorily mandated amount of retention. Also remaining unchanged in the statute are the provisions that state that: (1) “[a] contractor may not retain a percentage of payments due a subcontractor that exceeds the percentage of payments retained by the public body”; or (2) “[a] subcontractor may not retain a percentage of payments due a lower tier subcontractor that exceeds the percentage of payments retained from the subcontractor.” Therefore, in theory, subcontractors and lower tier subcontractors should also gain the benefit of the retention reduction throughout the entire course of the project. However, similar to the public body, the prime contractor and subcontractors can exercise their discretion to withhold additional money if “performance under the subcontract provides reasonable grounds for withholding the additional amount.”
If you are interested in viewing a copy of the revisions to Section 17-110, click here.