An electrical subcontractor finishes its work in month three of a fourteen month school project. The general contractor pays everything except the retainage, which stays where it is until the project is complete the following summer. Retainage operates that way by design, and on Indiana public projects the design is set by statute rather than by the parties.
Indiana’s public works statutes define retainage as an amount withheld from a payment to a contractor or subcontractor under the terms of a contract until a specified event occurs. The Indiana Court of Appeals has described the general purpose of retainage agreements as creating a temporary fund to secure payment of claims against the work and to allow the owner or surety to complete the project if that becomes necessary. Absent a retainage agreement, the payments would go to the general contractor, who would have the immediate use and benefit of the money.
Who owns retainage while it is held.
The retained money belongs to the general contractor. It is held as security to make sure the work is completed and that subcontractors are paid, and Indiana courts have relied on that ownership in deciding who receives the income the money earns. On that reasoning, a contractor was held entitled to the interest accrued on escrowed retainage, because interest follows principal as the fruit belongs to the tree.
Ownership is also what a subcontractor’s claim against retainage depends on. Where the State terminated a general contractor and spent more than the contract price to complete the project, the Court of Appeals held that a subcontractor had no claim against the retained funds because it could not show the general contractor owned them. The amount spent to finish the work greatly exceeded the retainage being held. A claim against retainage is worth no more than the general contractor’s interest in it, which is why payment bond rights and lien rights matter alongside it.
How much retainage may be withheld on an Indiana public project.
For local government public works contracts over $200,000, other than highways, roads, streets, alleys, bridges, and appurtenant structures, the statute sets out two structures. The board may withhold no more than six percent of the dollar value of all work satisfactorily completed until the public work is fifty percent completed, and nothing further after that point. Alternatively, the board may withhold no more than three percent of the dollar value of all work satisfactorily completed until the public work is substantially completed. At the contractor’s discretion, the retainage may be held by the board or placed in an escrow account with a bank, a savings and loan institution, or the state as escrow agent, and the board is not required to pay interest on retainage it holds directly. The statute is published under Title 36 of the Indiana Code.
Other chapters govern other public work. State agency public works contracts in excess of $200,000 are subject to a separate chapter, and a state agency may elect to apply that chapter to contracts of $200,000 or less. For state public works projects estimated at $200,000 or less, the director of the Division of Public Works may require a payment bond or, as an alternative, withhold ten percent of payments made to the contractor until the public work is substantially completed. Confirming which chapter applies is the first step, because the percentages and deadlines differ.
When retainage has to be released.
Payment in full, including all escrowed principal and escrowed income, is due within sixty one days following substantial completion under both the local government and state agency chapters. Substantial completion is the date the construction is sufficiently complete that the public body can occupy the structure for its intended use. If minor items remain uncompleted at that point, an amount equal to two hundred percent of the value of each uncompleted item, as determined by the architect engineer, may be withheld until the item is finished.
Payment down the chain carries its own deadline. Under the state agency chapter, a contractor must pay each subcontractor its share of the payment, based on the service performed, within ten days of receiving payment from the state agency or the escrow agent. A contractor who makes an incorrect certification that subcontractors have been paid may be found in breach of contract and may face suspension of prequalification.
The sixty day deadline for claims against public retainage.
Subcontractors, material suppliers, laborers, and those furnishing services on Indiana public works must file a claim within sixty days. The period runs from the date the last labor was performed, the last material was furnished, or the last service was rendered, and versions of this deadline appear in the local government chapter, the chapter governing public work performed at the expense of the state, and the Division of Public Works chapter. The Court of Appeals has held that a city was protected from a subcontractor’s claim against its retainage because that sixty day limitation period had passed.
Where claims are filed and there is no dispute among claimants, the public body pays them from money due the contractor and deducts those amounts from the contract price. Where there is a dispute, the body retains enough money to pay the claims until it is resolved. Payment bonds are a separate remedy, and on public projects above the statutory threshold the contractor must execute a payment bond for the benefit of subcontractors, laborers, and material suppliers, with claimants filing signed duplicate statements of amounts due within sixty days of completing their work.
Retainage on private construction projects.
Indiana’s retainage statutes apply to public works. On private projects, retainage is governed by the contract, and Indiana has no general statute limiting the amount or dictating the terms. Construction law commentary describes typical retainage as five to ten percent, often beginning at ten percent and reducing to five percent once the project is half complete, and Indiana case law has described the construction industry as typically providing for ten to fifteen percent retainage along with performance and payment bonds. Subcontractors and material suppliers who are not paid on private work rely on Indiana’s mechanic’s lien statute and on their contract claims.
Release conditions deserve as much attention as the percentage. The same commentary observes that the owner’s right to withhold is commonly passed down through the contracting tiers, so subcontractors bear the primary burden and a trade that finishes early can be partially financing the project for months. Indiana courts have awarded prejudgment interest on unpaid retainage where the amount due and the date it became payable were ascertainable by simple mathematical computation, though it is not automatic and has been denied where a public body was statutorily required to withhold funds because of a pending subcontractor dispute.
When to call a lawyer about withheld retainage.
Timing matters more here than the amount. Call while the sixty day window on a public project is still open rather than after several months of assurances. Call when retainage remains outstanding past the statutory release deadline on a public job, when backcharges appear against your retainage after your work was accepted, or when the general contractor above you has been terminated or has stopped paying. Our post on what to do when a customer will not pay your Indiana construction company covers the collection sequence, and our Indiana construction lawyers handle retainage and payment disputes for subcontractors, contractors, and owners.
Frequently asked questions about retainage in Indiana.
What does retainage mean in construction?
Retainage is an amount withheld from a payment to a contractor or subcontractor under the terms of a contract until a specified event occurs, usually substantial completion. Indiana’s public works statutes define it in those terms. It functions as security that the work will be completed and that lower tier parties will be paid. The withheld amounts accumulate over the project and are released at the end.
How much retainage can be withheld on an Indiana public project?
For local government public works contracts over $200,000, excluding highways, roads, streets, alleys, bridges, and appurtenant structures, the board may withhold no more than six percent of work satisfactorily completed until the project is fifty percent complete and nothing after that, or no more than three percent until substantial completion. State agency contracts in excess of $200,000 fall under a separate chapter, and for certain state projects estimated at $200,000 or less the director may require a payment bond or withhold ten percent until substantial completion. Confirm which chapter applies before assuming a percentage.
Is there a limit on retainage for private construction in Indiana?
Indiana has no general statute limiting retainage on private construction, so the contract controls. Commentary describes typical retainage as five to ten percent, and Indiana case law has described industry practice as ten to fifteen percent along with performance and payment bonds. Because no statutory ceiling applies, both the percentage and the release conditions are negotiable, and the release trigger often matters more to cash flow than the rate does.
When does retainage have to be paid on an Indiana public project?
Under both the local government and state agency chapters, the contractor must be paid in full, including escrowed principal and income, within sixty one days following substantial completion. Substantial completion is the date the work is sufficiently complete that the public body can occupy the structure for its intended use. If minor items remain unfinished, two hundred percent of the value of each unfinished item, as determined by the architect engineer, may be withheld until it is completed. Private projects have no statutory deadline, so the contract governs.
Can retainage be placed in an escrow account?
On local government public works contracts covered by the statute, retainage may be held by the board or placed in escrow with a bank, a savings and loan institution, or the state as escrow agent, at the contractor’s discretion. The escrow agreement requires the agent to invest the escrowed principal and to hold principal and income until it receives notice from both parties specifying the amount to be released and the recipient. The Court of Appeals has held an escrow agent liable for paying escrowed funds to a contractor without the owner’s written authorization. On private work, escrow is available only if the contract provides for it.
Who is entitled to interest earned on retainage?
Interest follows principal, so the party who owns the retained money is generally entitled to the income it earns. The Indiana Court of Appeals has held a contractor entitled to the interest accrued on escrowed retainage on that basis. A local government board that holds retainage directly rather than in escrow is not required to pay interest on it. Prejudgment interest on unpaid retainage has been awarded in some cases and denied in others depending on the circumstances.
What happens if I miss the sixty day deadline to claim retainage on a public project?
The claim against the retained funds can be lost even where the underlying debt is not disputed. The Court of Appeals has held that a city was protected from a subcontractor’s claim against its retainage because the sixty day limitation period had already passed. The period runs from the last labor performed, the last material furnished, or the last service rendered, so calendar it from the date your work on the site ends rather than from the date payment becomes overdue.
Can a subcontractor claim against retainage if the general contractor was terminated?
It depends on whether the general contractor still owns the retained funds. Where the State terminated a general contractor and spent more than the contract price to finish the project, the Court of Appeals held that a subcontractor had no claim against the retainage because it could not show the general contractor owned it. The amount spent to complete the work greatly exceeded the retainage held, which is the reason to look at payment bond rights and lien rights in that situation.
If retainage on one of your projects is overdue, or a deadline is approaching on a public job, we can look at where you stand. Our attorneys represent contractors, subcontractors, material suppliers, and property owners in Marion County, Hamilton County, and the surrounding central Indiana communities, and we handle these matters from drafting and negotiation through litigation. Call us at 317-829-6797 or reach us through our contact form and we will tell you what we can do.
The information provided in this article is for general informational purposes only and does not constitute legal advice. Reading this article does not create an attorney-client relationship. For legal advice tailored to your situation, please contact our firm directly by calling 317-829-6797 or by filling out our contact form.