One of the bills of interest to construction professions in the 2021-2022 session of the Georgia General Assembly, Senate Bill 438[1], recently passed and alters how much retainage is withheld on public construction projects.
Public owners[2] executing construction contracts have traditionally been allowed to withhold up to 10 percent retainage from each progress payment until a project is 50 percent complete, and then no further retainage is allowed to be withheld if the progress of work is satisfactory. However, public owners could increase retainage back up to 10 percent if the owner determined the contractor’s work was unsatisfactory or behind schedule. Public construction contracts executed prior to June 30, 2022 still follow this model.
For public construction contracts executed on or after July 1, 2022, the new law limits the amount that public owners can withhold to no more than 5 percent retainage throughout the life of a project[3]; the law no longer allows for a reduction in retainage upon 50 percent completion of the work.[4] The flat 5 percent retainage is welcome news to public works contractors. Less retainage means contractors receive more of each progress payment, and this will provide contractors and subcontractors with increased cash flow throughout the life of their projects.
The new law also affects retainage withheld by contractors and subcontractors on their respective lower-tiers. Within ten days from the contractor’s receipt of retainage from the owner, the contractor must release retainage on each subcontractor by the same percentage amount as the contractor’s retainage was reduced.[5] Similarly, a subcontractor, within ten days from its receipt of retainage from the contractor, must reduce each of its lower-tier subcontractors’ retainage by the same percentage.[6]
Punchlist Withholding Also Affected
For construction contracts executed prior to June 30, 2022, public owners can withhold an amount equal to 200 percent of the value of all incomplete minor work left to perform at the time of substantial completion.
The new law allows for withholding of up to 200 percent for incomplete work after substantial completion, but it removes the limitation to only minor work items.[7] This means that any items incomplete at the time of substantial completion are subject to withholding. This was likely done to prevent parties from arguing over what work is “minor” enough to meet the withholding threshold after substantial completion.
What Remains Unchanged
Several things remain unaffected by the new law. Owners and contractors can still jointly elect to release the retainage of subcontractors separately as they complete their work.[8] Owners are still required to release retainage within 30 days upon substantial completion of the work (except for their withholding rights for incomplete punchlist work).[9] And these retainage rules still do not apply to (a) contracts issued by the Department of Transportation for roads and highway improvements, and (b) public construction contracts executed with public owners that do not exceed $150,000 or 45 days in duration at the time of contract award.[10]
Senate Bill 438, which has now passed, provides increased cash flow for contractors and subcontractors working on public construction projects in Georgia. Construction professionals are encouraged to review their agreements for public construction projects as of July 1, 2022 to ensure they comply with the new law. Even on private contracts, the new law can be used as leverage to argue for lower retainage amounts.
About the Authors:
William Burnett, Darren Rowles, and Scott Cahalan are attorneys in the construction law and litigation section of the law firm Smith, Gambrell & Russell, LLP. You can reach them by telephone at (404) 815-3500 or by email at wburnett@sgrlaw.com, drowles@sgrlaw.com, and scahalan@sgrlaw.com. This article is for informational purposes only, and not for providing legal advice. You should contact an attorney to obtain advice about any particular issue or claim.
[1] A copy of Senate Bill 438 can be found here: https://www.legis.ga.gov/legislation/61647.
[2] Owner is defined as “the state, any county, municipal corporation, authority, board of education, or other public board, public body, department, agency, or political subdivision of the state.” See O.C.G.A. § 13-10-80(a)(4).
