Changes in NY Law Significantly Affect Retainage Withheld in Private Construction Contracts

On Friday, November 17, 2023, Governor Hochul signed into law a bill which limits the retainage held on construction contracts for private improvements to 5% of the contract price from inception of the project – this applies to an owner’s withholding of retainage from a contractor, as well as a contractor’s retainage withheld from subcontractors.

The bill also allows contractors to bill for Final Payment at Substantial Completion and further requires that all retainage must be released no later than 30 days after final completion, preventing withholding of retainage during any warranty period or the period for correction of the work by the contractor.

Any failure to release retainage as required by the new law subjects the withholding party to interest at the rate of 1% per month of the amount retained from the date the retainage was due.

The bill applies to contracts entered into after the effective date. However, the effective date of the bill is not clear as it is either November 17, 2023, when the bill was signed, or January 31, 2023, the date on the bill. A copy of the bill can be found at the following link: https://www.nysenate.gov/legislation/bills/2023/S3539.

These changes to the amount of retainage that can be withheld greatly reduces the security that retainage provided. In addition, it is anticipated that not only all construction contracts will need to be revised and amended, but that construction financing entities will need to amend the terms of their finance requirements to comply with the reduced retainage.

The new law also includes the right of contractors to now bill for Final Payment at Substantial Completion, when the project, and the typical conditions for release of final payment have not yet been met. For example, the contractor could bill for final payment without having completed the punch list and without providing close out documents, such as warranties, guaranties, as-builts, final lien waivers, and the like. Construction agreements should now specify that while the contractor may bill for Final Payment at Substantial Completion, Final Payment is not due until all conditions for Final Payment are met and approved.

For more information, please contact David M. Grill ([email protected]) or Pia E. Riverso ([email protected]) at Rivkin Radler.