Efforts to Eliminate Retainage Fee

The Federal Acquisition Regulation Council, in March, established a new rule change which classifies retainage as discretionary, and if contracting officers wish to require retainage, it would be set at a rate below ten percent. After nearly four years of continuous effort on the part of the American Institute of Architects, federal contracting officers are no longer required to withhold ten percent of fees for architectural or engineering services. If chosen, any amounts retained should not be held over beyond the completion of an instant contract. This new standard deviates from the previous retainage requirements in which retainage could be held until the completion of construction.

The efforts to eliminate retainage fees is based upon the fact that, generally, architectural and engineering firms had been singled out under the previous retainage rule, and that a ten percent retainage fee was not required by contractors. Recently, federal government projects have been increasing, and a significant change in the retainage fee rule allows smaller architectural and engineering firms to take on federal projects within any apprehension of not being able to afford to have money held back in retainage for several months or years.

The American Council of engineering Companies and the National society of Professional Engineers decided to support the American Institute of Architects in the effort to eliminate retainage fees after an architect, Paul Renker of Renker Eich Parks Architects based in Florida, was alerted in 2006 of the discrepancy after being hired to design a building for the Department of Labor. Renker’s firm’s retainage was held until approximately five hundred days after a contract notice to proceed, and the delay was particularly burdensome due to the small size of the firm and the fact that the firm had to borrow money to fund the project. After bringing the issue to the American Institute of Architects, the Small Business Administration was notified and suggested the retainage rule as one that should be reformed. In 2008, it was argued before the Small Business Committee that the retainage rule deterred small businesses from seeking work through the federal government, and that it was also counterintuitive to the Brooks Act, which sets a qualification-based selection process for architectural and engineering firms. A proposed rule was posted on May 9, 2009, and a final version was published on March 19, 2010, taking effect on April 19.

The American Institute of Architects supported the change in legislation to eliminate the ten percent retainage found in 48 CFR 52.232-10, but has yet to indicate whether it would be implementing the changes to the Institute’s own contract documents that are made available to the industry. However, the AIA upholds a commitment to a strict drafting and revision policies, and will adjust its standardized forms to support industry practice changes and evolving legal issues in an attempt to adapt to current trends and practices.

Contractors and others in the construction industry will likely keep a close eye on this issue to see whether the AIA shifts towards removing the retainage fee all together.  Retainage is often a source of conflict because contractors never want retainage held and it is one of the most common sources of problems at project end because the owner wants to keep holding it either because the work is not complete, is defective, was delayed or simply because the owner wasn’t really “holding” the retainage and no longer has the funds to pay it out.  In custom contracts most contractors will try to eliminate the retainage fee all together and hope they can keep the owner from requiring such a provision.

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