Three Problems With Retainage on NDDOT Projects

Three Problems With Retainage on NDDOT Projects

March 27, 2018

By Jeffrey A. Wieland

jaw-bp-portrait

 

Jeff Wieland is a Shareholder in the firm’s Construction Law and Commercial Litigation Department, licensed to practice in Minnesota and North Dakota . Jeff can be reached at 612.359.7605 or jwieland@fwhtlaw.com

 

 

I’ve always had mixed feelings on payday.  I love getting a tangible reward for my work.  But I also get a little upset about the deductions on my pay stub.  Who are these FICA and OASDI jokers and why do they get such a big chunk of my hard-earned money?  I’m sure contractors feel the same way about the retainage deductions on their pay applications.  Payment of retainage was an issue in several of my recent cases against the North Dakota Dept. of Transportation (NDDOT), so I decided to take a closer look at how retainage works on NDDOT projects.

Contractors are incentivized to work quickly because they usually get paid according to the amount of work they complete.  Move a yard of dirt; get paid for moving a yard of dirt.  Historically, however, contractors are not so great at submitting paperwork like payrolls, pit releases, and manuals.  Punchlist work can also tend to drag out.  Project owners invented retainage to create an incentive for contractors to complete the contract tasks that do not show up directly as a pay item on the schedule of values.[1]

On my recent NDDOT cases, there were three retainage issues.  The first issue was the timing of payment of retainage.  The second issue was the amount of retainage held by the Department.  The third issue was the strings NDDOT attached to payment of the retainage.  I was curious to see if those issues were isolated to just my cases or if they are common, so I submitted an open records request to NDDOT to get data on all the projects that had final estimates issued between December 2016 and December 2017.[2]  I received data on 147 projects, ranging in value from $50,000 to over $30,000,000.  I found that the problems my clients encountered on their projects seem to be widespread.

Problem 1:  NDDOT is Slow to Pay Retainage

Retainage, by its nature, is paid at the end of the project.  When the contractor finishes its work on an NDDOT project, it is required to notify the Engineer in writing and to request a final inspection.[3]  The Engineer must respond within five days to coordinate the final inspection.[4]  After the inspection, the Engineer must either accept the project or provide written instructions for correction of unsatisfactory items.[5]  Upon project acceptance, “the Engineer will prepare the final progressive estimate.”[6]  While the Engineer is required to respond to a request for inspection within five days, the Standard Specifications are silent as to how long the Engineer may take to issue the final estimate.  Under general North Dakota contract interpretation law, that means that “a reasonable time is allowed.”[7]  The North Dakota Legislature placed a more stringent requirement on the Department.  By law, “payment must be made in full upon the completion of the contract and acceptance of the work.”[8]

The final estimate releases retainage, corrects errors in previous progressive estimates, and reconciles all deductions and payments on the project.[9]  When the Department issues a final estimate, it sends a cover letter stating when the project was completed and when it was accepted, as well as giving notice that issuance of the final estimate triggers a deadline to file claims.  Those letters, which I requested under the Open Records Statute, are useful because they show the lags between the contractor’s completion of the work, project acceptance, and issuance of the final estimate.  That last piece is important because the Department does not pay retainage until the Engineer issues the final estimate.

Looking at the 147 projects on which I have data, I found that there was an average of 42 days between the contractors’ completion and project acceptance.  In many instances, projects were accepted on the same day as completion.  Without delving into the specifics of each project, an average lag of six weeks between project completion and acceptance is easy to see if there were items that had to be corrected.

The delay between project acceptance and issuance of the final estimate is another story entirely.  The average time to issue the final estimate was 184 days after project acceptance.  Six months on average!  The chart below shows the distribution of the delays.  Most of the 147 contracts had final estimates issued between 52 and 202 days after acceptance.  But several contracts had much longer delays.  Three contracts had delays of over 500 days!

Remember that the final estimate is only issued after the work is done and has been accepted.  That means that NDDOT is holding contract funds that the contractor has earned while the Department has the full use and benefit of the contractor’s work.

A cynic might wonder if NDDOT is slow to pay retainage because it is trying to collect interest on the funds as long as possible.  If that was true, then higher value contracts would have longer delays on their final estimates.  The chart below graphs the final estimate delay against the nominal value for each contract.  It does not seem to show a strong correlation between the size of the contract and the length of delay, although two of the three contracts in the $30 million range had final estimate delays greater than 500 days.

The contractors I represented complained that NDDOT was unreasonably slow to pay retainage.  It appears that is a common issue on NDDOT projects.

Problem 2:  NDDOT Holds Too Much Retainage Too Long

The North Dakota Legislature requires NDDOT to withhold at least 1% retainage on progress payments.[10]  Fortunately for contractors, NDDOT currently only withholds 2% retainage, even though it is statutorily authorized to withhold as much as 10%.[11]  The 2% retainage in the 2014 Standard Specifications is an improvement from the 4% retainage in the 2008 edition of the Standard Specifications.[12]  NDDOT is actually relatively contractor-friendly in the amount of retainage it withholds.[13]

The problem my clients saw was that the Standard Specifications conflict with the North Dakota Century Code after the work is complete.  While North Dakota law requires NDDOT to withhold at least 1% retainage while the work is in progress, it also requires payment in full “upon completion of the contract and acceptance of the work.”[14]  The problem is that NDDOT is not authorized to continue to withhold retainage after completion of the work, yet it holds retainage for long periods of time after completion of the work and project acceptance while it prepares the final estimate.  On larger contracts, 2% retainage can be several hundred thousand dollars.  Few businesses can afford to have a receivable that large on their books for an average of 184 days, let alone more than 500 days.[15]

The Standard Specifications call for 2% retainage in general, but they also give NDDOT discretion to lower that amount at the end of the project.  For example, when at least 90% of the work has been completed, the Engineer has the discretion to lower retainage to 1% if all releases and payrolls are submitted and the project is on track to finish on schedule.[16]  When the project is 100% complete, the Engineer has further discretion to hold less than 1% retainage.[17]  That discretionary language in the Standard Specifications appears to allow NDDOT to continue to withhold retainage even after the work is complete and accepted, which is contrary to statute.

I was curious to see how often NDDOT exercised its discretion to lower retainage at the end of the projects.  I looked at the amount of retainage paid on the final estimates, divided by the original contract value to calculate the percentage of retainage held by the Department.  I graphed those data points against the length of time between contract acceptance and issuance of the final estimates.

The data shows two distinct clusters around the 1% and 2% retainage lines.  There is a little spread in the data around those lines, probably resulting from different methods of calculating percentage of retainage.  Instead of using the initial contract value, some project engineers may have used contract values adjusted by change orders or actual quantities on the projects.  In any event, it looks like the option to reduce to 1% retainage was used about a third of the time.  The option to reduce retainage to less than 1% appears to be used very rarely.  There was only one project in this data set that had retainage reduced to near zero, which was good for the contractor because the retainage was held for over 500 days.

Problem 3:  Strings on Retainage

Contractors have the right to make claims on NDDOT projects.[18]  But even though it is statutorily required to make payment in full upon project acceptance, NDDOT refuses to pay retainage until contractors waive any claims they may have.  While not quite rendering the claims provisions in the Standard Specifications illusory, that position certainly makes it financially more difficult for contractors to make claims.

The Department relies on § 109.06 of the Standard Specifications, which says that the Department will pay the contract balance after “the Contractor signs the final estimate.”  But signing the final estimate has contractual consequences.  “The Contractor, by signing the final payment statement, accepts the amount stated as full and final payment on the contract and waives all rights to any further payments for the contract.”[19]  The Department has also taken the position that the only way a contractor can sign the final estimate so that it can be paid its retainage is to execute a CARS Final Claim for Payment form.  That form has waiver language embedded in it.[20]  The Department willfully withholds money that the contractor has earned and that the Department is statutorily obligated to pay as a financial lever to encourage contractors to waive their claims.

So What Can Contractors Do?

At first blush, this looks like an application of the Golden Rule:  Whoever has the gold makes the rules.  While NDDOT gets to make many of the rules because they’re the ones who write the Standard Specifications that are incorporated into the contracts, the Department doesn’t get to make all the rules.  The legislature also makes rules.

One of those rules is the statute that requires the Department to make payment in full when the project is accepted, N.D.C.C. § 24-02-25.  If the Department does not follow that rule, then another rule, the North Dakota Prompt Payment Statute, can come into play.  That statute imposes 21% interest, compounded every 45 days, on public entities if they do not pay their bills on time.[21]  Contractors should consult with legal counsel to make sure they are properly documenting their claims, including claims for payment of retainage with Prompt Payment Statute interest.

 

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[1] Retainage is also used to pay claims against the contractor.  That can be a source of conflict between the contractor and the owner.  This aspect of retainage is outside the scope of this article.

[2] North Dakota’s Open Records Statute is codified as N.D.C.C. § 44-04-18.  Like its federal counterpart, the Freedom of Information Act, the Open Records Statute is a great tool to learn how the government conducts its business.  “N.D.C.C.” is the abbreviation for the North Dakota Century Code, the state’s collection of statutes.  Those laws are available at http://www.legis.nd.gov/general-information/north-dakota-century-code.

[3] See NDDOT Standard Specifications for Road and Bridge Construction (“Standard Specifications”), 2014 edition, § 105.15.

[4] See id.

[5] See id.

[6] Standard Specifications § 109.06.

[7] See N.D.C.C. § 9-07-22 (“If no time is specified for the performance of an act required to be performed, a reasonable time is allowed.”

[8] N.D.C.C. § 24-02-25.

[9] See Standard Specifications § 109.06.

[10] See N.D.C.C. § 24-02-025 (“Payment must be made monthly to the contractor for all work done or material furnished, in such amount as must be determined by the director, but in no event less than ninety percent nor more than ninety-nine percent thereof, and payment must be made in full upon the completion of the contract and acceptance of the work.”).

[11] See id.; Standard Specifications § 109.04(B).

[12] Compare Standard Specifications, 2008 ed., § 109.05(A) with Standard Specifications, 2014 ed., § 109.04(B).

[13] For comparison, Minnesota permits up to 5% retainage on building and construction contracts.  See Minn. Stat. § 337.10 subd. 4(b).

[14] See N.D.C.C. § 24-02-25.

[15] To put this in perspective, on a $30 million contract, 2% retainage equates to $600,000.  In the data I looked at, there were two such contracts that had final estimate delays of more than 500 days.

[16] See Standard Specifications § 109.04(C).

[17] See id.

[18] See N.D.C.C. § 24-02-26.1; Standard Specifications § 104.06.

[19] See Standard Specifications § 104.05(A).

[20] It says:  “I Certify that this is a true and correct statement of the work performed and accept the amount stated as full and final payment on the contract for the stated project.”

[21] See N.D.C.C. chapter 13-01.1.

This discussion is generalized in nature and should not be considered a substitute for professional advice. © 2018 FWH&T

 

 

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