One significant problem that contractors and subcontracts face pertains to the timing of the release of retainage on construction projects. Retainage is a portion of the agreed upon contract price withheld until the work is substantially complete to “ensure the proper performance of the contract or agreement”. Section 436.303 of the Revised Statutes of Missouri (hereinafter “RSMo”). This article will analyze the legal requirements in Missouri pertaining to retainage on private construction projects.
Applicability of the Retainage Statutes:
In 2002, the Missouri Legislature adopted a series of statutes that placed certain requirements and restrictions on the withholding and release of retainage on “all private construction projects, except single-family residential construction and other residential construction consisting of four or fewer units.” Section 436.336 RSMo. The statutes, which are found at Sections 436.300 through 436.336 RSMo. (the “Retainage Statutes”), pertained to all contracts entered into after August 28, 2002. Section 436.336 RSMo. Additionally, the Retainage Statutes pertained to “any contract or agreement for private construction work that is between any owner and any contractor, or between any contractor and any subcontractor, or between any subcontractor and any sub-subcontractor or any supplier at whatever tier.” Sections 436.300 RSMo. and 436.330 RSMo.
Violation of the Retainage Statutes:
A construction contract formed in violation of the terms of the Retainage Statutes is deemed unenforceable to the extent its provisions are inconsistent with the requirements of the Retainage Statutes. Section 436.333 RSMo. Additionally, if retainage is withheld in violation of the terms of the Retainage Statutes, a Court or arbitrator is authorized to award, in addition to damages, interest at a rate of up to one and one-half percent per month and reasonable attorney’s fees. Section 436.333 RSMo. It should be noted that the awarding of interest and attorney’s fees pursuant to Section 436.333 RSMo. is placed within the discretion of the Court or arbitrator and according to the Statute attorney’s fees may be awarded to the “prevailing party.” So, in the event a party files a lawsuit for violation of the Retainage Statutes and does not prevail, the defending party may be awarded attorney’s fees as by the Court or arbitrator well.
Violation of the Retainage Statutes occurs where a party to a private construction contract fails to make payments of retainage in accordance with the requirements of the construction contract, so long as the payment requirements comply with the Retainage Statutes. Section 436.300 RSMo.
Amounts that may be Withheld as Retainage:
The maximum amount of retainage that may be withheld is ten percent (10%). Section 436.303 RSMo. However, the owner is authorized to withhold additional sums to protect the owner’s interest in satisfactory performance of the contract. Section 436.303 RSMo. If additional funds are withheld, it is advisable to provide or request written notice of the reason for the withholding. It is also advisable to include a provision of within the construction contract that requires written notice to be provided prior to withholding any funds for this reason. Any amounts withheld by the owner (or presumably any other party) as retainage are held “in trust” for the benefit of the party from whom it is being withheld. By holding it “in trust” certain additional obligations are placed on the withholding party.
A contractor is prohibited from withholding more in retainage from a subcontractor than the owner withholds from the contractor. Section 436.315 RSMo. Thus, if the owner is withholding retainage of five percent (5%) from the contractor, the contractor is prohibited from withholding any amount in excess of five percent (5%) from the subcontractor. The exception to this is if the subcontractor’s performance is not in accordance with the terms of the subcontract. Section 436.315 RSMo.
Release of Retainage:
The project owner is required to release all retainage or substitute security, which will be discussed in Section E below, within thirty (30) days of the project reaching “substantial completion”. Section 436.324 RSMo. “Substantial Completion” is achieved for purposes of the Retainage Statutes, “upon the occurrence of the earlier of the architect or engineer issuing a certificate of substantial completion in accordance with the terms of the contract documents or the owner accepting the performance of the full contract.” Section 436.327 RSMo.
The owner is authorized to continue to withhold, beyond thirty (30) days, an amount equal to one hundred fifty percent (150%) of the cost to complete any remaining items. Section 436.324 RSMo. Thus, the only amount that may be withheld thirty (30) days after Substantial Completion is a one and a half times the cost to complete remaining work. Any amounts withheld in excess of this are withheld in violation of the Retainage Statutes.
Upon the release of retainage by the owner to the contractor, the contractor is required to pay each subcontractor the subcontractor’s “ratable share” of the retainage released, provided that all conditions of the subcontract for release of retainage to the subcontractor have been satisfied. Section 436.318 RSMo. Thus, the subcontractor may be required to furnish certain close out documents, lien waivers or other items required by the subcontract prior to receiving the subcontractor’s “ratable share” of the retainage.
Additionally, if a subcontractor’s performance of its work has been satisfactorily completed, the subcontractor’s retainage may be released prior to substantial completion of the entire project. Section 436.321 RSMo. In this event, the contractor may request an adjustment in the retainage from the owner to enable the contractor to pay the subcontractor in full. If the work has been satisfactorily performed and the contractor makes the request, then the owner is required to release the subcontractor’s retainage as part of the next payment cycle. After receipt, the contractor is required to release the subcontractor’s retainage to the subcontractor as part of the contractor’s next payment cycle. Section 436.321 RSMo.
Substitute Security for Early Release of Retainage:
Retainage may be released early to either a contractor or a subcontractor upon the providing of acceptable substitute security so long as the contractor or subcontractor is not in default. Sections 436.306 and 436.309 RSMo. If retainage has already been withheld, the owner is required to pay amounts withheld to the contractor within five (5) working days of the contractor tendering acceptable substitute security to the owner and a written request for the release of the retainage. If retainage has not been withheld, then following the providing of the substitute security and the written request, the owner is not to withhold retainage from the contractor going forward. Section 436.306 RSMo.
Similarly, a subcontractor can tender substitute security to the contractor with a written request that any previously withheld retainage be released and any future retainage not be withheld. Section 436.309 RSMo. So long as the subcontractor is not in default, the contractor is to tender this substitute security to the owner. The contractor is required within five (5) working days of receipt of any retainage previously withheld from the owner to pay the retainage to the subcontractor. Additionally, future retainage may not be withheld by the contractor following the tendering of acceptable substitute security so long as the subcontract is not in default.
Section 436.312 RSMo. defines “acceptable substitute security” to be the following: (1) certificates of deposit; (2) retainage bonds; and (3) irrevocable letters of credit in favor of the owner.
Certificates of deposit must be drawn and issued by a national banking associated located in Missouri or any banking corporation incorporated pursuant to the laws of the State of Missouri and “mutually agreeable to the project owner and the contractor and subcontractor.” Additionally, the certificates of deposit must be in the amount of the retainage released. If the certificate is not renewed at least sixty (60) days before its expiration, the owner may draw upon it in an amount equal to the value of the amount of work remaining to be performed by the contractor or subcontractor. Section 436.312.1 (1) RSMo.
A retainage bond provided as substitute security must name the owner as the obligee (i.e. the party benefited by the bond) and must be issued by a surety company authorized to issue surety bonds in the State of Missouri. The amount of the retainage bond must be the amount of the retainage being released. Section 436.312.1 (2) RSMo. Other than the foregoing, the Statutes contain no description of what constitutes an acceptable retainage bond.
Alternatively, a contractor or subcontractor can furnish an irrevocable and unconditional letter of credit in favor of the owner. It has to be issued by a national banking associated located in Missouri or any banking corporation incorporated pursuant to the laws of the State of Missouri. It also has to be issued in the amount of the retainage being released. Section 436.312.1 (3) RSMo.
The party depositing the substitute security is entitled to receive all interest and income earned by any security deposited in substitution of retainage. Section 436.312.2 RSMo.
 While no Court has interpreted this particular provision, it would appear that its requirements would merely invalidate those portions of the construction contract that violate the terms of the Retainage Statutes, rather than invalidating the entire construction contract since the Statute utilizing the phrase “to the extent their provisions are inconsistent.”
Joseph C. Blanner
McCarthy, Leonard & Kaemmerer, P.C.