Battling Against Payment Retainage

Material suppliers selling in the construction industry may find substantial portions of money due to them, held up by “retainage.” This practice is intended to ensure that subcontractors’ work is satisfactorily completed. Suppliers who point out that the delivery of satisfactory materials completes their contractual obligations have had enough. Dana F. Schnipper, president & CEO at JC Ryan EBCO/h&G LLC is pushing for state legal action to correct what he argues is the blatant misuse of the practice.

It was nearly two years ago that JC Ryan EBCO/H&G LLC finished supplying $2.5 million in doors, frames, and finish hardware to a hospital construction project. They are still waiting for the $80,000 that has been “retained.” This is not an isolated instance, and the abuses of retainage have become a crusade for Schnipper, who manages credit for JC Ryan.

“When you ask a general contractor why they are doing this (Is it to make sure we complete the job, or is it because you need us to finance your job?) the answer always comes back, unwillingly, ‘so we can finance the job,’” Schnipper said. “Retainage enables them to calculate their bids, knowing they will not have to pay 10% to the supplier or interest on the money for two years out. While the supplier pays the interest, the contractor can get more work by lowering their bids. The owner of the project is a direct beneficiary because he doesn’t have to go out and ask for the money from the lender in order to pay the materials supplier. The owner and the contractor are in cahoots to take advantage of the material suppliers.”

The concept of retainage began in England late in the 19th century and was intended to ensure that the work of subcontractors (i.e. drywall and HVAC installers) was satisfactory before a project was deemed complete. Most owners withhold these funds from their contractors, as retainage applies to labor, until the end of the construction project to guarantee that the project is satisfactorily finished. The time period for project completion can run anywhere from one to three years. Then, sometime early in this century, it began to seep into payment agreements with material suppliers. Schnipper places some of the blame on blanket construction contracts devised by the American Institute of Architects.

“Years ago, they would never do it on the materials because, since delivery of a product is the completion of a contract, materialmen should be exempt from having retainage held on them,” said Schnipper. “Once materials are delivered, that portion of the contract is completed, as the materialmen no longer have any control over the products.”

“There’s no other industry where a buyer can purchase a completed product but hold back a portion of payment for that product,” he continued. “Retainage, by its very definition, applies to services, not to goods. Often, material suppliers are the second largest ‘lender’ on a construction project, behind only the financial institutions. The holding of anywhere from 5% to 10% of the billing total creates a cash flow ‘crunch’ for most material suppliers, which are by nature small to mid-size distributors, many being independently owned businesses.”

Holding retainage on material suppliers places them in an unfair financial situation as they have no recourse against the contractor. Once the product is altered or installed, the material supplier has no leverage.

“For example, once a door frame is installed, a material supplier cannot return this product for credit or utilize it on a subsequent project,” Schnipper said. “For the most part, these are specialty-made products specific to the project requirements.”

Schnipper has presented his concerns to the New York State Legislature through Assembly Bill 574 (Braunstein) and Senate Bill 5498 (Brooks), which would EXEMPT all material suppliers from retainage holding. This legislation includes provisions to guarantee any supplier acting as an installer of products would still be eligible to have retainage held on them, along with any materials “not covered” by a manufacturer’s warranty or ungraded materials.

“These two provisions guarantee the general contractor that retainage still applies to labor and that material purchases are protected in case of product defects,” Schnipper concluded.

Schnipper believes that, if passed in New York, these bills could create a “domino” effect across other state legislatures ignited by material suppliers throughout the United States.

About the Author:
Dana Schnipper can be reached at dschnipper@fjcryanebco.com  or at 631-694-0008, ext. 231.