PURPOSE
Typically, construction contracts have a portion of most payments deducted from the progress payment amount due to the Contractor. This amount is called retention and is defined in the project specifications. The retention amount is 5% from each approved progress payment. Retention is a valuable cost control tool for the Construction Manager for three reasons. First, it provides incentive for the Contractor to continue to complete the construction in order to get the retention at the close out of the contract. Second, it ensures that the construction work is performed correctly since retention is not released until all items in the Final Inspection Correction List are corrected (see Procedure 25.3 – Final Retention Release). Third, in the event of financial difficulty or default by the Contractor, retention monies can be used to pay subcontractors or make corrections to in-place work the Contractor does not correct.
In addition to retention, monthly payments due to the Contractor may be further reduced or withheld entirely if the Contractor fails to comply with specific requirements of the contract, or if there are credits due to the City.
The purpose of this Procedure is to document the procedures used for retaining funds and withholding monthly payments in construction contracts.
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RESPONSIBILITIES
Contractor: On or before the date stipulated by the contract documents, the Contractor shall submit its monthly progress payment estimate request to the Lead Inspector (LI).
Construction Manager (CM): The CM is responsible for working with BCA to evaluate the need for continuing to retain and/or withhold portions, or all, of the progress payment(s) due to the Contractor.
Bureau of Contract Administration (BCA): BCA is responsible for calculating the retention amount as a part of the Contract Progress Payment Estimate (CPPE) procedure and recommending the release of disputed retention amounts upon acceptance of the contract by the Board of Public Works (BPW). BCA is also responsible for withholding portions, or all, of the progress payment(s) due to the Contractor as deemed necessary.
PROCEDURE
Retention
On or before the date stipulated by the contract documents, the Contractor shall submit its monthly progress payment estimate request to the LI. The LI will review the payment request, determine the value of the work performed the previous month and prepare a Contract Progress Payment Estimate (CPPE) for approval. After the PI approves the CPPE, the Payment Section of BCA will calculate the retention amount and deduct it from the amount due to the Contractor.
Retention money will be withheld until contract acceptance by the BPW. The LI should check with the CM to ensure that there are no pending credit change orders and confirm that there are no accumulated liquidated damages, potential penalties, or other disputed monies.
At all times during the course of the contract, the City will maintain the 5% retention amount, until completion of all contract work. After the Statement of Completion is issued, the City has 60 days to release all undisputed retention monies to the Contractor. Acceptance of the Contract by the BPW may be delayed as a result of penalty investigations or delays in obtaining certified payroll and/or final subcontracting reports. Disputed retention amounts may be withheld until acceptance of the Contract by the BPW.
Withholding
In addition to retention, the LI may request the Payment Section of BCA to withhold a portion, or all, of the progress payment due that month for the following reasons:
If the Contractor is not diligently complying with the intent of the contract
If there are unresolved Notices of Non-Compliance
If technical manuals are not submitted
If record drawings are not kept up to date
If progress photographs are not submitted
If construction schedules are not submitted in accordance with the specifications
If lien claims or Stop Notices are filed on behalf of vendors, suppliers and/or subcontractors in connection with the project
The progress payment may also be withheld or reduced when there are outstanding amounts due to the City for any of the following:
Equipment or materials furnished by the City for which the Contractor is responsible
Services rendered to the Contractor by the City
Liquidated damages under the terms of the contract
Amounts required to be deducted by federal, state, or local governments or other provisions of the contract
At its own expense, the Contractor has the option to substitute securities for any money being retained and/or withheld by the City. Securities eligible for such substitution include bank certificates of deposit or other securities eligible for investment pursuant to California Government Code. The Contractor, with approval of the City, will deposit securities with a bank. The bank will serve as the escrow agent and will pay such monies to the Contractor upon notification by the City that payment can be made. Such notification will be given within 60 calendar days after issuance of the Statement of Completion. Continued retention of adequate securities may be requested by the City to cover properly executed and filed Stop Notices. Any securities substituted for monies retained and/or withheld, shall be owned by the Contractor. The Contractor shall receive all interest earned from the escrow account.
If the Contractor did not establish an escrow account and the City is retaining funds to cover Stop Notice claims, the Contractor may elect to submit a Stop Notice Release Bond issued by an approved Surety company. Upon approving the Bond, the City will release such portion of the retained funds to the Contractor that is being held solely to cover the Stop Notice claims.
RELATED PROCEDURES
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