Property owners seeking to insulate themselves from some of the inherent risks associated with construction projects often turn to retainage provisions to reallocate very specific risks—the risks of delay, defective performance and default—to the parties actually doing the construction. A retainage provision is a contractual clause whereby the owner withholds some percentage of the prime- and sub-contractors’ earned compensation until their work is complete. The percentage withheld for retainage is sometimes reduced at 50 percent completion or at another milestone. Retainage gives contractors a strong economic incentive not to abandon the job. Particularly near the end of a project, a contractor may find that the cost of completing its work outstrips the remaining value of the contract. Withholding retention incentivizes a contractor to stay on the job, see it through to completion and correct all remaining deficiencies with the project.

In some states, retainage provisions became so onerous and withholding percentages so steep that legislatures had to intervene on behalf of contractors and subcontractors. Utah has adopted a retainage statute that governs, among other things, the amount of retention an owner can withhold and affixes penalties if retention is improperly retained upon completion of the project. While the statute has reined in many aspects of retainage, it explicitly conditions the release of retention proceeds upon the owner’s final acceptance of the project without defining “final acceptance,” thereby giving parties an opportunity to agree among themselves on the conditions upon which final acceptance will be granted and retention proceeds released.

Pursuant to Utah Code § 13-8-5, Utah’s retainage statute, the total retention proceeds withheld from a project may not exceed 5 percent of the total contract price. Utah Code § 13-8-5(3)(b). Further, the maximum percentage that can be withheld from progress payments by an owner[1] to its contractor, or by any tier of contractor to its sub-contractors, cannot exceed 5 percent. Utah Code § 13-8-5(3)(a). Notwithstanding the normal 5 percent maximum, however, if a contractor or sub-contractor breaches or defaults on the construction agreement, the owner may withhold retention in an amount greater than 5 percent for as long as reasonably necessary to cure the breach or default. Utah Code § 13-8-5(8)(a). The owner must explain the reasons for this additional withholding in writing within 45 days of the withholding. Utah Code § 13-8-5(8)(b).

Any money withheld by the owner as retainage must be maintained in an interest-bearing account. Utah Code § 13-8-5(4)(a). The interest is for the benefit of the prime contractor and subcontractors and must be distributed to the prime contractor and subcontractors pro rata after the project is accepted by the owner. Utah Code § 13-8-5(4)(b)-(c). The owner must release retainage to the prime contractor within 45 days from the latest of the following: (a) the date the owner receives the prime contractor’s billing statement; (b) the date that a certificate of occupancy or notice of final acceptance is issued to the prime contractor, the owner or the architect; (c) the date that the building inspector permits partial or complete occupancy of a building; or (d) the date the prime contractor accepts the final pay quantities. Utah Code § 13-8-5(5).

Meanwhile, once the owner releases retention proceeds to the prime contractor, the contractor must release any retainage it has withheld to its own subcontractors within 10 days thereafter. This applies as between subcontractors and their subcontractors as well. Utah Code § 13-8-5(9).

Any violations of this statute subject the violating party to potential liability for attorney’s fees and other costs. Utah Code § 13-8-5(10)(a). Additionally, any knowing and wrongful retention of funds is subject to an added 2 percent interest fee per month on the wrongfully withheld amounts. Utah Code § 13-8-5(10)(b).

Utah’s retainage statute goes a long way towards evening the playing field between subcontractors, contractors and owners with regard to the withholding and payment of retention funds. By limiting the amount owners can withhold from prime contractors—and, in turn, that prime contractors can withhold from subcontractors—to 5 percent of each progress payment, not to exceed 5 percent of the total contract price, the legislature keeps owners from forcing prime and subcontractors to disproportionately bear more of the up-front costs and financing of the work. The statute also requires retainage to be held in a separate interest-bearing account, with interest accruing for the benefit of the prime contractor and subcontractors, which prevents owners from using retention funds to effectively “finance” all or parts of the project, or from earning interest off of the contractors. Finally, it cracks down on the improper withholding and/or use of retention funds by levying strict penalties, including attorneys’ fees and an additional 2 percent interest, against violators.

Still, the retainage statute leaves an important “out” for owners. The statute explicitly conditions the release of retention funds upon the occurrence of the “late[est]” of a list of triggering events, one of which is the issuance of a “final acceptance notice” by the owner to the contractor. Yet the statute fails to specify what must be accomplished before the owner is obligated to issue such a notice to the contractor, instead of leaving it up to the parties to define “final acceptance” without the benefit of statutory guidance. This provision gives the owner the opportunity to negotiate a favorable definition of “final acceptance” in the construction contract, effectively de-clawing perhaps the most important provision in an otherwise fairly contractor-friendly statute. Case law in Utah is similarly silent on what conditions trigger final acceptance by the owner under the retainage statute. Consequently, if there is a breach of the terms governing final acceptance in the construction contract, the owner likely may continue to withhold retention—and, indeed, ramp up its retention to proportions greater than 5 percent —for “as long as reasonably necessary to cure the breach.”

To ensure that owners release retention fees in a timely manner upon completion of a construction project, prime contractors should negotiate an explicit, objective definition of “final acceptance” in their construction contracts. It is especially important that the contract contain clearly defined terms regarding the award of the final acceptance notice from the property owner. Conversely, owners who wish to increase the economic incentive for prime contractors and subcontractors to complete their work should condition “final acceptance” upon the owner’s subjective satisfaction with the project. A broad definition of “final acceptance,” conditioned upon the owner’s subjective approval of the work, would probably permit owners to withhold retention funds for as long as is reasonably necessary to encourage contractors to complete the project according to contractual specifications and timelines.