New Law Sets Maximum Construction Contract Retainage at 5% in New York

2 min

On November 17, 2023, Governor Kathy Hochul signed a bill into law amending Sections 756-a and 756-c of the New York State Prompt Payment Act (N.Y. Gen. Bus. Law §756 (McKinney 2009)) governing restrictions on retainage and invoicing of final payment by contractors in construction contracts.

The law applies to privately owned commercial construction projects where the contract sum exceeds $150,000 and mandates that owner-held retainage cannot exceed 5% of the contract sum, nor may contractors require retainage from subcontractors in excess of the percentage retained by owner.

The law also allows contractors to invoice for final payment in full upon achieving substantial completion (as defined in the applicable construction contract) rather than final completion. The law does not modify the existing language in Section 756-c requiring that "Retainage shall be released by the owner to the contractor no later than thirty (30) days after final approval of the work under a construction contract." While the contractor must be permitted to submit a final payment invoice upon substantial completion, we see no express prohibition on the contract including reasonable preconditions to the payment of such invoice, as long as final payment is due no later than 30 days after final approval of the work.

The law applies to contracts entered into on or after November 17, 2023, and any failure to release retainage as required by the law will subject the owner to interest at the rate of 1% per month from the date that such retainage was due to be released.

Notwithstanding these amendments, we believe there are strong arguments to be made for permitting owners and contractors to negotiate terms that differ from these provisions, given express language elsewhere in Section 756-a acknowledging that terms and conditions of a construction contract may supersede the provisions of Section 756, except as otherwise provided in the statute.

For these reasons, owners and contractors should consult and work closely with counsel when negotiating construction contract provisions related to retainage and payments, as well as similar provisions in other agreements, including funding conditions in construction loans or release of tenant improvement funds under leases.

For more information, please contact Michael Phillipou, Brian Lustbader, Suzanne St. Pierre, John Walsh, or any of the other attorneys in our New York Real Estate or Construction groups.