Retainage can be tricky in Alabama, particularly on public projects. In this post, we address retainage on public projects for public owners in the state (e.g., a governmental board, commission, agency, body, authority, instrumentality, or department).
A public owner in Alabama may withhold up to 5% retainage from the prime contractor for up to 50% percent project completion (Ala. Code § 39-2-12). However, after 50% completion of the project has been accomplished, the owner cannot withhold additional retainage. While this statute is clear about how public owners should withhold retainage from prime contractors, it is not specific about how contractors should treat retainage for downstream subcontractors and suppliers. This statute also does not address whether payment bond sureties are responsible if the contractor fails to pay the subcontractor or supplier retainage.
Although not directly on point, in Keller Constr. Co. of Nw. Fla., Inc. v. Hartford First Ins. Co., the Alabama Civil Court of Appeals provided some guidance on how to treat retainage for downstream subcontractors on public projects. In that case, the Civil Court of Appeals held that a contractor and surety have no obligation to pay retainage downstream that the public owner has not paid to the contractor if the subcontract includes a pay-if-paid clause (generally requires the contractor to pay a subcontractor or supplier only if the contractor receives payment from the owner for the subcontractor’s or supplier’s work). For contractors, this means that they do not have to come out of pocket to pay retainage funds to subcontractors and suppliers. Instead, contractors can wait to pay the subcontractors and suppliers retainage once the public owner releases the retainage to the contractor.
To better manage the release of retainage on public projects in Alabama, contractors may benefit from including pay-if-paid clauses in their subcontracts. Alternatively, contractors should consider tying release of retainage to whatever the trigger is for release from the public owner in the prime contract. That should help mitigate the risk of a contractor having to fund retainage to suppliers or subcontractors whose work is completed early on in a public project, while the owner is still holding such funds from the contractor. If you have any questions about retainage or other Alabama construction law issues, please do not hesitate to reach out to David Owen or Mason Rollins.