Beware of Stealth Retainage
Kegler Brown Construction Newsletter June 1, 2005
Ohio statutorily limits retainage on public works to 8 percent on the first half of work and (assuming satisfactory performance) 0 percent on the second half; for an effective rate of 4 percent. Interest on the retainage is paid to the prime contractor.
However, many public authorities including some schools utilizing OSFC funds are beginning to hold back "stealth retainage" in the form of a "backloaded" schedule of values that withholds excessive amounts for project closeout documents, meeting attendance, and other routine project matters.
The end result is an effective retainage rate far in excess of typical contractor and subcontractor profit and grossly in excess of the state's statutory retainage rate. Like traditional retainage, a backloaded schedule of values is an inefficient method of securing satisfactory project performance as it cannot be used to target only those who prove to have performance problems on an as-needed basis, and unnecessarily increases construction costs.
Contractors and subcontractors may want to approach public owners and their construction managers to secure elimination of this "stealth retainage" or challenge these withholdings in court. Absent some change, voluntarily or with the assistance of the legislature or the courts, contractors and subcontractors will simply have to pad their bids with the hidden costs of financing jobs in this fashion.