New York Amends Its Law on Withholding of Retainage and Final Invoicing on Private Construction Projects

On November 17, 2023, Governor Hochul signed a bill placing significant restrictions on the amount of retainage that can be withheld from contractors and subcontractors, and permitting the earlier submission of final billing for work performed on private projects in New York. The bill amends the NY General Business Law.  

Here is What You Need to Know:

1. First, on all contracts of $150,000 or more on private construction projects, retainage can no longer exceed 5% of the total contract sum – and, for subcontractors, the amount may not exceed the amount withheld by the owner from the general contractor. That is, if the owner only withholds 3% retainage from the general contractor, then the general contractor may not withhold more than 3% retainage from its subcontractors. The law formerly allowed for the withholding of retainage in any amount so long as it was “reasonable,” which, in practice, was often 10%.
2. Second, upon substantial completion of the contractor’s work on a private construction project, a contractor may submit its final invoice for payment in full, which would presumably include the full amount of retainage withheld under the contract and the value of work yet to be completed. The law formerly had provided for such final invoicing only upon the performance of all of the contractor’s contractual obligations. A project owner must now timely and clearly reject all or part of a final payment application submitted at substantial completion, rather than at final completion, to avoid the presumption of the payment application’s validity. Traditional hold-backs for punch list completion or to otherwise ensure that all deliverables are received by a project owner are potentially eliminated by the new law. All owners, and contractors engaging subcontractors, should consider evaluating and altering the completion payment terms in their contracts, including, critically, when substantial completion occurs, to account for these changes in the law.
3. It is worth noting that the law does not amend the existing obligation that retainage must be released “no later than 30 days after the final approval of the work under a construction contract.” Based on the law’s amendment regarding invoicing, allowing for final billing upon substantial completion, it raises the question of whether this 30-day retainage payment period is now from final approval of substantial completion rather than final approval of all work. Since the law leaves the prior existing retainage payment timing in place, so that retainage must be released not later than 30 days following final completion and approval, there is a strong argument that retainage can be held until final approval of full completion rather than substantial completion. However, this ambiguity will likely have to be resolved through litigation or further legislative action. 
4. Finally, this new law became effective when signed on November 17, and applies only to those contracts entered into on or after that date. So, if an owner, contractor or subcontractor on a private job in New York is now entering into a contract, it must comply with this new law. This will pose a particular problem on projects where the prime contract predates the November 17 date, but subcontracts were or will be entered into afterwards. If the prime contract has the traditional 10% retainage provision, absent concessions from ownership and lenders, the prime contractor, during the course of the project, will be forced to fund the extra 5% retainage of the value of any affected trade. Naturally, any contracts entered into after November 17, 2023 need to consider the impact of this new law.