On November 17, 2023, Governor Kathy Hochul signed into law Senate Bill S3539/A4167 (the "Five Percent Retainage Bill"), which amended certain sections of New York's General Business Law, limiting the retainage held on construction contracts for private improvements. The Five Percent Retainage Bill aims to reduce the amount of retainage withheld by owners from contractors on private construction projects. This new law goes into effect immediately and applies to contracts entered into on or after November 17, 2023.
A Summary the Five Percent Retainage Bill
The Five Percent Retainage Bill amends Sections 756-a and 756-c of New York's General Business Law ("GBL") by capping retainage that may be withheld on private commercial construction projects that equal or exceed $150,000 at five percent of the total contract sum. Additionally, the Five Percent Retainage Bill amends the GBL by entitling contractors to submit a final invoice for payment in full upon reaching substantial completion, instead of at the customary final completion.
Notwithstanding the contractor's ability to issue a final invoice at substantial completion, however, the Five Percent Retainage Bill does not eliminate or modify the existing payment timing requirement under the GBL that all retainage be released by the owner to the contractor no later than thirty (30) days after final approval of the work. These obligations flow down to lower tier subcontractors. Any failure to release retainage as required by the GBL subjects the withholding party – whether that be an owner, contractor, or subcontractor – to a payment of one percent interest per month on the date retention was due and owing.
Practical Application to Private Construction Projects
First, it should be noted that the Five Percent Retainage Bill's cap on withholding retainage is measured against the total contract sum. The new law does not specifically address how such retainage may be allocated during the course of a project and whether, for example, an owner may allocate retainage so that individual payments are subject to retainage of amounts greater than five percent, so long as the aggregate amount of retainage withheld does not exceed five percent of the total contract sum. However, the law itself is not yet entirely clear on the allocation of retainage and has not yet been interpreted by NY courts, and as such, parties will have to carefully draft such provisions into their agreements.
Second, it is also important to note that the Five Percent Retainage Bill only entitles contractors to submit a final invoice for payment in full upon reaching substantial completion, but does not require final payment until after final completion. Owners should include in their construction agreements provisions that clearly define final completion upon which the law's final payment requirements will be triggered.
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Last, passage of the Five Percent Retainage Bill will, in addition to its direct impact on construction contracts, have a substantial impact on construction financing agreements, which often contain their own retainage requirements on the borrowers. Such agreements may require amendment to comply with the Five Percent Retained Bill's reduced retainage cap.
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