The subject of retainage withheld from construction projects is often poorly understood, and can lead to confusion, error, and conflict. In its latest session, the Texas Legislature made several revisions to Chapter 2252, Subchapter B of the Texas Government Code (“Subchapter B”), now entitled “Retained Public Works Contract Payments,” via House Bill 692. These changes are in effect for contracts subject to Subchapter B and entered into on or after June 15, 2021. In particular, Section 2252.032 was overhauled, redefining retainage requirements on public projects in various ways.
Governmental entities are now required to define substantial completion in public works contracts, as well as the circumstances under which retainage will be released for substantially complete versus fully completed and accepted portions of a project. Governmental entities are also required to maintain a record of retainage withheld from and released to a prime contractor under a public works contract.
Different types of public works projects and parties within those contractual chains are assigned more specific retainage requirements, as follows:
- For either competitively awarded contracts over $10 million or a contract awarded under a method other than competitive bidding, some of the previous Subchapter B was preserved, allowing the governmental entity and prime contractor to agree to deposit retainage in an interest-bearing account. For these types of public works contracts, the governmental entity is also required to pay out any retainage and interest to the prime contractor upon project completion.
- For public works contracts less than $5 million (or that relate to the construction or maintenance of a dam as defined by Section 423.0045), governmental entities cannot withhold more than 10% of the contract price or any bid-schedule or schedule-of-values item.
- For public works contracts of at least $5 million, governmental entities cannot withhold more than 5% of the contract price or any bid-schedule or schedule-of-values item.
- For subcontracts entered into by the prime contractor for the purpose of fulfilling a public works contract, the prime contractor cannot withhold from a subcontractor a greater percentage of retainage than the percentage that may be withheld from the prime contractor. This also applies to any sub-subcontracts.
- The above requirements do not apply to a governmental entity that (i) receives certain financial assistance under the Texas Water Code for a project formally approved (as defined by the statute) by the Texas Water Development Board; or (ii) is a wholesale water supplier to customers in at least ten counties and governed by Chapter 49 of the Texas Water Code. Instead, these entities are required to deposit in an interest-bearing account any required retainage exceeding 5%.
Governmental entities are not permitted to withhold retainage after completion of the public work project, including during the “warranty period” (newly defined as the period of time during which terms applicable to the warranting of the public work are in effect). Nor may governmental entities withhold retainage in order to require the prime contractor to perform work on manufactured goods or systems specified by the designer of record and properly installed by the contractor after the public work is complete.
However, governmental entities are permitted to continue to withhold retainage upon written notice to the prime contractor if (i) there is a bona fide dispute with the prime contractor over labor, services, or materials either provided by the prime contractor or under the prime contractor’s direction or control that failed to comply with the public works contract; or (ii) a surety for a bond executed for the contract does not agree to release retainage. In the absence of a bona fide dispute or any contractual default, the prime contractor may cure any noncompliant work or offer the governmental entity reasonable, monetary compensation for any noncompliant work that cannot be cured promptly (though the governmental entity is not required to accept it).
House Bill 692 will likely help streamline policies and procedures affecting retainage on public works projects, with respect to the amounts required to be withheld and released, the timing of same, and the conditions under which defective work may be resolved.
Increased predictability, order, and consistency should help industry participants assess and manage cash flow and risk management as a result. To help avoid unnecessary disputes, contracts should be drafted to operate in harmony with the new statute’s protocols.
Research and writing assistance by Reilly Lowe, 2021 Summer Law Clerk