Shifting Tides of New Contractor Retainage Legislation - North Carolina Public Projects

On June 12, 2007, my colleague Culley Carson posted a blog entry entitled "Public Owners Beware: Legislation in North Carolina General Assembly Will Cap Retainage in Public Construction Projects." A variation of this legislation was recently ratified and signed into law by the Governor on August 17, 2007. To see the new legislation, click here. Bottom line, the original very pro-subcontractor legislation has been watered down by influence from owner and design professional interest groups.

In summary, the legislation, which takes effect on public projects with contracts entered into after January 1, 2008, revised § 143-134.1 of the NC. General Statutes as follows:

• § 143-134.1(b1) – No retainage on public projects which cost less than $100,000 (diluted: original draft was $300,000).
• § 143-134.1(b1)(1) – For public construction projects over $100,000, retainage is capped at 5%.
• § 143-134.1(b1)(2) – If contractor performs satisfactorily, no more retainage may be withheld after the project reaches 50% completion.
• § 143-134.1(b1)(4) – Full retainage less 2.5 times (diluted: original draft was 1.5 times) the value of work to be completed or corrected due to contractor within 60 days (diluted: original draft was 45 days) of substantial completion or when "owner receives beneficial occupancy or use of the project" (diluted: original draft included when certificate of occupancy issued).
• § 143-134.1(b2) – Early finishing trades (i.e., structural steel, piling, caisson, demolition, etc.) that satisfactorily complete 100% of their work by 50% completion of the job get line item release of full retainage less (the following are new dilution terms) 0.5% of the subcontract amount contingent on architect/engineer approval of acceptability of subcontractor’s work.

For public owners that are accustomed to retaining 10% until final completion, this sea change takes away much of their leverage. But thanks to lobbying efforts by the American Institute of Architects, the following caveat provision was added at the end of the revised § 143-134.1:

(e) Nothing in this section shall prevent the owner from withholding payment to the contractor in addition to the amounts authorized by this section for unsatisfactory job progress, defective construction not remedied, disputed work, or third-party claims filed against the owner or reasonable evidence that a third-party claim will be filed.

This caveat provision inserted into the legislation at the last minute allows owners to stem the tide and maintain leverage on public projects. (This entry published by Ken Michael, a member of Womble Carlyle’s real estate and construction law practice group.)