Withholding of Funds

With most contracting methods, the owner holds the largest clout, that being the funds for payment. With varying degrees of success, withholding payment for incomplete work may be the owner's most effective means of getting a contractor's attention. However, the effectiveness of this can largely depend on the amount of money still outstanding to be paid to the contractor, assuming that progress payments have been made during the course of the project.

As a project nears completion, the amount of money outstanding can be so small that a contractor may be willing to forfeit this payment in lieu of performing the project close-out, or addressing problems in equipment or system operation. Because of this, it is important for the owner to specify a retainage of the total project cost, expressed as a percentage, in the contract documents. This percentage is withheld from each progress payment and only paid after final project close-out and completion of punch list items. Retainage generally falls in a range of 5 to 15% of a contract amount and is meant to equate (roughly) to the contractor's profit. Thus, the contractor would not be inclined to walk away in the above example, as the owner would use the retainage to hire another contractor to complete the work. The original contractor would forfeit all or at least a substantial portion of its entire gross margin, as well as the margin on what work it failed to complete.

Another limiting factor is the owner's risk exposure for incomplete work. This could be loss of production time or inability to maintain space conditions or support critical mission activities or the loss of expected energy cost savings from an efficiency project. In such cases, withholding money does not necessarily result in getting the project completed on schedule. An extreme result of lack of contractor performance can be termination of the contract. This can be done for a number of reasons, including lack of performance, negligence, or failure to adhere to project rules and regulations.

It is, however, important to note that the contractor that has performed the work as planned and has completed all punch list items rightly deserves prompt payment of all outstanding monies owed, including retainage. In order to protect the contractor from undue withholding of final payment, it is important for the contractor to ensure that the contract documents call for payment of outstanding invoices if the owner does not respond to a final written request for payment within a specified period of time. If necessary, this response should take the form of an updated punch list of problems or issues that the owner feels have not been addressed. If no such issues exist, this clause will provide the contractor some legal weight against the owner to demand due funds.

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