Are You Taking Advantage of Methods For
Expediting Receipt of Your Retention?
By William C Last, Jr.
For years it has been possible for a prime contractor working on a California public works project to have its retention placed in an escrow account that is managed by a licensed escrow agent or, alternatively, post securities in lieu of retention. If one of these options is elected, a prime contractor can earn interest on the earned but unpaid retention Since the escrowed retention funds are no longer in the public entities accounts, it is not uncommon to have the retention released earlier than normal.
If a prime contractor elects this right, its subcontractors are also entitled to earn an identical rate of interest on their escrowed funds. Effective January 1, 1999, the public works prime contractor is generally prohibited from retaining a greater percentage from his subcontractors then that being withheld under the prime contract. This article will discuss the requirements for establishing an escrow account and the rights of subcontractors relative to the percentage of escrow that can be withheld.
The Prime Contractor's Retention Rights
Public Contract Code § 10263 requires a California public entity to include in its invitation for bid and contract documents a provision that: (a) permits the substitution of securities for any moneys withheld by a public agency, or (b) alternatively allows the prime contractor to require the public entity to make payment of the retention to an escrow agent. It should be noted, however, that certain chartered cities and/or counties (e.g. San Francisco or Los Angeles) may be exempt from this requirement.
The statute states: "At the request and expense of the contractor, securities equivalent to the amount withheld shall be deposited with the State Treasurer or, a state or federally chartered bank in this state, as the escrow agent, who shall then pay the moneys to the contractor. Upon satisfactory completion of the contract, the securities shall be returned to the contractor.
Alternatively, the contractor may request and the owner shall make payment of retentions earned directly to the escrow agent. The contractor may direct the investment of the payments into securities and the contractor shall receive the interest earned on the investments upon the same terms provided for in this section for securities deposited by the contractor. Upon satisfactory completion of the contract, the contractor shall receive from the escrow agent all securities, interest, and payments received by the escrow agent from the owner, pursuant to the terms of this section."
Failure to state this right in the bid and contract documents will void any provisions for performance retention in a public agency contract.
The statute has further restrictions and requirements. For example, if you elect this option, the escrow agreement must substantially include certain language set forth in the code section. Thus, if you are interested in exercising this right you should carefully review and follow the statutory requirements.
The Subcontractor's Retention Rights
Public Contract Code § 10263 also affects subcontractors whose subcontract amounts are greater than five percent of the total bid. The code section provides that:
"Any contractor who elects to receive interest on moneys withheld in retention by a public agency shall, at the request of any subcontractor, make that option available to the subcontractor regarding any moneys withheld in retention by the contractor from the subcontractor. If the contractor elects to receive interest on any moneys withheld in retention by a public agency, then the subcontractor shall receive the identical rate of interest received by the contractor on any retention moneys withheld from the subcontractor by the contractor, less any actual pro rata costs associated with administering and calculating that interest." A prime contractor cannot require you to waive this right.
The statute also allows a subcontractor to post securities in lieu of retention, if the prime contractor makes such an election. If the subcontractor chooses not to exercise this option, Public Contract Code § 7200 allows the prime contractor to withhold retention.
Public Contract Code § 7200 is a code section that provides additional retention related rights to subcontractors. However, the section is only applicable to contracts entered on or after January 1, 1999. This section is applicable to chartered cities.
The code section provides that in a contract between the original contractor and a subcontractor, and in a contract between a subcontractor and any subcontractor thereunder, the percentage of the retention proceeds withheld may not exceed the percentage specified in the contract between the public entity and the original contractor. However, this restriction is not applicable when a performance and payment bond is required in the solicitation for bids, if either of the following situations exists: (1) in a contract between a prime contractor and a subcontractor, the subcontractor fails or refuses to provide a performance and payment bond; and (2) in a contract between a subcontractor and a lower tier subcontractor, the lower tier subcontractor fails or refuses to provide a performance and payment bond. A contractor cannot require that the rights provided under this code section be waived.
Public Contract Code § 7200 also provides that in the event that the contractor elects to substitute securities in lieu of retentions, the contractor may withhold from his or her subcontractors, who have not elected to substitute securities in lieu of retentions, the amount of retentions that would have otherwise been withheld.
Public Contract Code § 10263 and Public Contract Code § 7200 provide valuable rights to both prime contractors and subcontractors who enter into California public works contracts. Not only can you potentially earn interest on the retained funds, but the added psychological effect of removing the retention funds from the public entities account can speed the final disbursal of retention. If your retention is not being paid as due, you should also review your rights under the prompt payment statutes. An earlier article discussed the prompt payment statutes. As noted, the statutes include additional requirements and restrictions. Thus, if you are interested in exercising the legal rights the statutes provide, you should carefully review and follow the statutory requirements.
This article, ©1999, was written by William C. Last, Jr. Mr. Last is an attorney who has been specializing in Construction Law for twenty years. He also holds and "A" and "B" California contractors license. He can be contacted at 415-764-1990 or 650-425-7679. This bulletin is published periodically to provide general information about current legal issues. The articles are not intended to be a substitute for the advice of an attorney as to a specific problem. If you have a specific legal question or need legal advice, you should contact an attorney.