Retainage on a contract is often a subject of bitter dispute between parties to a construction contract. The partying that is receiving payment always wants the retainage to be minimal or eliminated all together. The party that is paying always wants more retainage to protect it against potential deficiencies or problems. Under New York law, retainage is permitted but the owner may only withhold a “reasonable amount”. The contractor may then withhold a reasonable amount from subcontractors and so on down the contract chain. However, nobody can withhold more than the owner is withholding from the general contract. For example, if the owner is withholding 10% from the general contractor then the general contractor may not withhold more than 10% from its subcontractor and the subcontractor may not withhold more than 10% from its sub-subcontractor, etc.
The owner must release the retainage no later than 30 days after final approval of the work under a construction contract (as defined in GBL Article 35E). The general contractor must in turn release the retainage to the subcontractor and the release must likewise flow down the contract chain. If the retainage is not released on time, then by statute it will accrue interest at a rate of 1% per month until released.