A pending Indiana bill would reduce retainage requirements in public works projects, decreasing the portion of payment withheld from contractors until a construction project reaches completion. (Getty Images)
A House measure seeking to reduce financial strain on construction contractors made additional headway in the legislature Wednesday and now heads to the Senate floor.
Key elements of House Bill 1033 would establish a uniform, maximum amount of retainage for certain state and local public works projects.
Retainage is the portion of payment withheld from a contractor or subcontractor until a construction project reaches substantial or full completion.
Under current state law, one retainage option requires no less than 6% and no more than 10% of an agreed-upon contract price for a public works project to be withheld until the work is halfway done. A second option in code permits no less than 3% and no more than 5% of the contract price to be retained from final payment until work is “substantially complete.”
Indiana law does not currently regulate retention for private construction projects.
The latest version of the bill, authored by Republican Rep. Jim Pressel, would eliminate the minimum retainage requirement for publicly funded projects and lower the maximum withholding percentages by 4% for both retainage options:
- From 10% to 6% of completed work until the project is half-done.
- From 5% to 3% of completed work until the project is substantially complete.
The Senate Pensions and Labor Committee unanimously approved the plan Wednesday. The House previously voted 84-1 in favor of the bill.
The goal, Pressel said, is to lower the dollars withheld and help improve cash flow for construction companies while work is underway — especially for contractors whose work is finished months, even years, before the overall project is completed.
“The best example I can give is the first guy in — that’s going to be the excavator. Next guy in is the foundation guy, or the concrete guy, that does the footings and the walls. And then the structure goes up from there,” Pressel, of Rolling Prairie, explained. “If I’m the excavator, or one of the first guys, current law allows up to about 10% of my final payment to be withheld. So, I have to wait for those dollars until the job is substantially completed. The policy question is, is that the right amount that should be withheld from that contract?”
Fewer dollars withheld
Retainage, common practice for construction contracts, is typically included in construction agreements to ensure contractors complete the job according to specifications — and serves as a financial motivator to get work finished.
It also provides public agencies with leverage for resolving disputes that might arise over incomplete or defective work.
But Pressel, along with a handful of Hoosier business representatives, noted that overly burdensome retainage can strain cash flow for contractors who often spend their own money to pay for the work between periodic payments.
If I’m that excavator, if I’m that foundation guy, and I performed my service — it’s been inspected, and I no longer have anything to do with the project — good policy would dictate that you should be paid 100%, right?
– Rep. Jim Pressel, R-Rolling Prairie
“Contractors making 50% on a project is pure myth. It doesn’t happen. Some of the small operators typically work on a 3% net margin, and in some instances, they could have that amount withheld for maybe a year. If it’s a large project, it could be two years,” Pressel said. “What this is doing is resetting the maximum amount so that the subcontractor and contractor really are not financing the entire project as it goes along.”
House Bill 1033 specifically applies to state and local public works projects exceeding $200,000, such as for government buildings, schools, utilities and other municipal infrastructure. Excluded, however, are projects related to highways, roads, streets, alleys, bridges and related structures.
“If I’m that excavator, if I’m that foundation guy, and I performed my service — it’s been inspected, and I no longer have anything to do with the project — good policy would dictate that you should be paid 100%, right?” Pressel said. “Why are you being held up with what could potentially be all of your profit? And if you have multiple jobs going on … $50,000 sitting in retainage on this job, and $50,000 on this job, and $50,000 on that job, I may never see my potential profit until I retire.”
Contractors in support
An initial draft applied retainage limits to both public and private construction projects, but an amendment adopted in the House limited the bill’s scope to just state and local public works projects.
Dax Denton, chief policy officer for the Indiana Bankers Association, said the narrowed language “strikes a good balance.”
Jake German, representing the National Fire Sprinkler Association, agreed.
“This makes sure there’s still protection and still retainage in place, but allows these guys to get paid more of what they’re owed so they can move on to the next one — take their workforce and continue to help build structures and buildings around the state of Indiana,” he said, adding that the legislation was largely prompted by increases in expenses since the onset of the COVID-19 pandemic.
“Everybody knows that, if you’ve been around construction, or, heck, if you just talk to friends in construction, where prices have gone, right?” German continued. “Well, 10% of $100,000 is less than 10% of a million dollars, and as prices have gone up, the retainage has has been at that high level of 10%, and that’s just costing and requiring these guys to have more money held back.”
Steve Kovecsi with Ryan Fireprotection, a Noblesville-based company that provides commercial fire sprinklers and other fire protection services, said current retainage rates can make contractors “feel like we’re also a bank, because we’re covering the payer.”
He told the Senate committee last month that Ryan Fireprotection had $5.9 million worth of retainage sitting on its books, still unpaid. Two-thirds of those dollars are owed on projects that are at least 95% complete — but most are already 100% done, Kovecsi said. On average, the company’s work is completed for 359 days before withheld payment is received.
“We hear things like, ‘We have to wait for the grass to grow. We’re waiting for the painters to come in. We have to wait for the tile guys to come in and finish tiling,’” Kovecsi said. All the while, “we still cannot get our money.”
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