Retainage Reform Bill Pending in Ohio

Kegler Brown Construction Newsletter

Retainage is an important and controversial issue in the construction industry, particularly for subcontractors. The American Subcontractors Association (ASA) conducted a nationwide survey of almost 600 subcontractors from 39 states and determined that the average subcontractor was carrying $620,025 in retainage receivables an average of 160 days after the subcontractor successfully completed his work. As these retainage rates generally exceed profit margins, subcontractors are acting as "the bank" in financing the project. This hidden financing cost of retainage must be passed through to contractors and owners and ultimately reflected in project cost or subcontractors will go out of business.

Representative Hagan has introduced H.B. 497, a bill designed to reform retainage practices on public and private commercial work in Ohio. H.B. 497 as currently drafted would require that:

  • Retainage on private work would mirror retainage provisions of public work (an effective rate of 4% of labor).
  • Line item release of retainage.
  • General contractors could hold no greater percentage of retainage than held on them.
  • Owner would have to pay retainage (less items in dispute) within 60 days of certificate of occupancy.
  • Prohibition of mandated and overvalued retainage – type items in schedule of values ("stealth retainage"); and
  • Address any unintended problems with The Prompt Pay Act and make consistent with the retainage provisions above.

The federal government and the Ohio Department of Transportation (ODOT) have already eliminated retainage on virtually all projects, and the trend appears to be to reduce or eliminate retainage on a more frequent basis.