28 February 2014

Colorado legislature votes down retainage bill

Yesterday, the Colorado House of Representatives committee on Business, Labor, Economic, & Workforce Development rejected a bill that would have capped retainage in private construction contracts at five percent.

Many construction contracts permit an owner or developer to withhold ten percent or more of a contractor's earnings to ensure that the work is completed properly. The practice of withholding retainage is not new, and likely originated with the need to rely on inexperienced contractors to build railways in the Nineteenth Century. In theory, this allows an owner to retain the contractor's profit prior to substantial completion, while paying enough during construction to ensure that the contractor is not forced to finance the job.

HB 14-1165, which was modeled after existing requirements for public works projects in Colorado, would have required owners and general contractors on private projects to "pay at least ninety-five percent of the calculated value of completed work" to subcontractors on an ongoing basis, and it would have imposed penalty interest and attorney fee sanctions on anyone who violated this provision. The bill contained exemptions for single-family homes, multi-family properties with less than five units, and projects costing less than $150,000.

Attorney Jesse Witt of The Witt Law Firm testified on behalf of the Community Associations Institute against the bill. He noted that the bill would impose complicated accounting requirements on volunteer leaders of community associations and subject them to draconian penalties if they made an error. Although public works contractors are accustomed to such requirements, residential community associations would likely need to hire outside professionals to ensure compliance with these regulations, and this could significantly increase the cost of many projects. In addition, the amount of retainage is typically negotiated between the parties, and there was no apparent need for the legislature to regulate these transactions.

After hearing testimony on both sides of the issue, the committee voted to postpone the bill indefinitely, effectively ending its run through the 2014 legislative session.