Major Impact On All Nys Private Construction Contracts As Nys Governor Hochul Signs Law To Mandate 5% Maximum Retainage On All Private Construction Contracts And Payment Of Retainage Can Now Be Sought Upon Substantial Completion
On November 17, 2023, NYS Governor Kathy Hochul signed into law significant modifications to General Business Law §§756-A and 756-C which will have a great impact on construction agreements for private projects. Specifically, GBL §756-A was amended to now provide that contractors and subcontractors may submit a final invoice for work performed and the release of retainage upon substantial completion of the project. Also, GBL §756-C was amended to provide that five percent (5%) of the contract sum is the maximum allowable retainage that can be withheld from the contractor or subcontractor (as the case may be), during the project.
Retainage Must Now Be Released Upon “Substantial Completion”
Prior to the effective date of the new law, which is November 17, 2023, GBL §756-A entitled a contractor or subcontractor to submit a final invoice for payment “upon the performance of all the contractor’s obligation under the contract…” This language was generally taken to mean final completion – that is, after all punch list work is complete and all work has been approved by owner, architect, or both. Among the purposes of GBL-756-A was so the owner could have some assurance that the contractor would return to the project to complete punch list work, and to secure the owner (to some degree) for defects, costs, and possible back charges that it might have against the contractor at the end of the project. This owner-driven protection, however, often frustrated many contractors as owners sometimes withheld retainage for an unreasonable amount of time and leveraged it to extract additional work from the contractor without additional payment.
Now, the newly passed modification to GBL §756-A.2 drastically changes the above-quoted statutory language and provides that:
A contractor shall be entitled to submit a final invoice for payment in full upon reaching substantial completion, as such term is defined in the contract or as it is contemplated by the terms of the contract.
(Emphasis added).
Most people who work in construction and development, including construction law practitioners, commonly recognize “substantial completion” to mean when the property can be used for its intended purpose and that often correlates to when the temporary certificate of occupancy is issued by the governmental agency with authority over such matters.
The language in the newly passed legislation must be taken into consideration during the negotiation and drafting of the construction contract so there is no misunderstanding of the term “substantial completion” and when the contractor is entitled to receive its retainage.
Retainage is Now Limited to 5%
GBL 756-C used to provide permit the parties to agree on a “reasonable amount” of retainage, and what was “reasonable” was often negotiated by the parties but usually landed at 10%. Not anymore!
As of November 17, 2023, GBL §756-C mandates that “an owner may retain no more than five percent per annum of the contract sum as retainage.”
While the 5% difference between the usual (now unlawful) 10% and the newly legislated 5% maximum retainage may not appear much, the delta becomes more obvious the larger the project.
For owners, it is a loss of a certain level of security and leverage; for contractors, it means more of the contract sum and payment sooner rather than later, which is the stated purpose of the new legislation.
Goetz Fitzpatrick has been practicing law throughout the New York Metropolitan area and The Hamptons, since 1967. The firm has deep expertise in Construction and Real Estate, as well as Corporate, Bankruptcy, Trust & Estates and Labor & Employment. The firm’s office is located at One Penn Plaza, Suite 3100, New York, NY 10119, Telephone 212 695 8100.
