Signed into law by Colorado Gov. Jared Polis on May 17, 2021, and made effective as of Sept. 7, 2021, HB21-1167 implements a new retainage law applicable to construction contracts for private projects. In general, retainage is the withholding of a sum of money to a contractor until the construction project is completed, usually as a form of financial incentive to ensure that the work will be completed satisfactorily. Previously in Colorado, retainage rates were limited to 5% on public construction projects only, and there was no statutory limit on retainage for private projects. Although there was no statutory limit, the industry standard for private projects was between 5%‒10%.
Pursuant to HB21-1167, for private project contracts exceeding $150,000, retainage may not be more than 5% of the price of the work completed. The statute exempts contracts with a public entity, or contracts between a private owner and contractors for single-family dwellings and/or multifamily dwellings not exceeding four units. If this law applies to the prime contract between the owner and general contractor, it automatically extends to subcontracts and purchase orders entered into by the general contractor, no matter the dollar amount.
The new statute does not change, override or invalidate other contractual provisions, such as: a provision relating to the timing of payment; a provision requiring satisfactory performance of the work before payment is due; a provision authorizing back charges from other amounts due; a “pay-if-paid” provision between a contractor and subcontractor; and a requirement that the payee provide an executed lien waiver for amounts actually paid.
Here are some practical implications of HB21-1167 on the construction industry:
- Prior to HB21-1167, general contractors frequently listed certain cost items as being exempt from retainage (such as insurance and bond premiums, contractor’s fee, or general conditions costs). These exemptions, though never popular among owners/developers, were easier to justify when retainage was set at 10%. Now that retainage is capped at 5%, owners/developers will likely be reticent to grant such exemptions because it would lower the overall rate of retainage withheld. On the other hand, general contractors may argue that owners/developers have no right to withhold retainage on such items because HB21-1167 expressly limits retainage to the “price of the work completed.” Case law will likely be needed to resolve whether that phrase permits owners/developers to withhold retainage on fee, markup and other surcharges.
- In general, owners/developers and lenders are expected to be more strict when it comes to releasing retainage. For example, when owners/developers withheld 5%‒10% retainage on private projects, they would often release retainage to certain subcontractors whose work was completed early in comparison to the completion of the project as a whole. With the passage and enactment of HB21-116, owners/developers are likely to be stricter about the early release of retainage, if they allow it at all, in order to ensure that adequate funds remain withheld through the project’s completion. As a result, there is likely to be an increase in subs and suppliers recording notices to extend their mechanic’s lien rights so that these rights do not expire with the passage of time.
- Similar to No. 2 above, it used to be common in the industry for owners/developers to reduce the percentage of retainage over the course of the project, as long as the general contractor was successfully progressing with the work. For example, retainage may have started at 10%, but was reduced to 5% (or even 0%) at the midway point of the project. Under the new statutory scheme, owners/developers are unlikely to agree to any reduction in retainage, but instead are likely to insist on keeping retainage at 5% until the project is satisfactorily completed. Relatedly, because the statute does not define the phrase “satisfactorily completed,” nor otherwise distinguish between “substantial” and “final” completion, caselaw will likely be needed to determine when retainage must be released, unless it is clearly defined in the parties’ contract.
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