Co-Author: Lauren M. Taylor[i]
This summer, the Colorado General Assembly adopted new limits on the amount of retainage a property owner can withhold from contractors and subcontractors in private construction contracts.
Retainage and Limits
Retainage is a percentage of a contract or subcontract price withheld from a contractor by a property owner until the completion of a contract or construction project. Retainage serves two general purposes: First, retainage provides an incentive to a contractor or subcontractor to complete a project on time and in conformance with specifications. Second, retainage provides protection against issues that may arise in the construction process, such as substandard work, liens, and defaults. Historically, it was common for an owner or general contractor to withhold 10% of the total contract price for any construction work. This meant that a contractor or subcontractor, after completing their portion of a project, would only be paid 90% of what was owed, sometimes until the entire project was completed. In 2011, Colorado placed caps on retainage for public works projects with the enactment of Colo. Rev. Stat. §§ 24-91-103 et seq. The 2011 statute limited retainage to 5% on any construction contract over $150,000 if funded by a state, county, city, town, district, or political subdivision.
The 5% Cap Now Applies to Private Construction Contracts
The recent changes, which Governor Polis signed into law as part of House Bill 1167, extends the 5% cap to private construction projects exceeding $150,000, subject to exceptions for single-family homes and multi-family dwellings with less than four units. In addition, the new law states that, in order to receive payment, the recipient of the retainage must provide an executed lien waiver for amounts actually paid if required by the contract, subcontract, or supply agreement.
Contractors should note that the new bill does not alter existing law concerning the requirement to hold funds in trust for the payment of subcontractors and suppliers. Under Colo. Rev. Stat. § 38-22-127, a contractor must always hold funds received from an owner in trust for the payment of subcontractors, suppliers, and laborers on a job; and the contractor must maintain separate records of account for each project or contract. This is true regardless of whether any amounts are designated as retainage, and the failure to hold funds in trust can subject a contractor to liability for civil theft and treble damages.
The passage of the new law will align Colorado law with thirteen other states that have already instituted similar caps on retainage for private contractors. The law will go into effect on September 6, 2021.
For more information on Colorado construction and real estate law, please contact the attorneys at Frascona, Joiner, Goodman and Greenstein.
A full copy of the bill text is available here.
[i]Lauren M. Taylor was a law clerk with Frascona, Joiner, Goodman and Greenstein.
This article was also published in the COLO. REAL ESTATE J. (November 2021)