One of the construction trades bills in the 2021-2022 session of the Georgia General Assembly, Senate Bill 438[1]recently passed, changing how much withholding is withheld on public works projects.
Public Owners[2] Executing construction contracts have traditionally been permitted to withhold up to a 10 percent deduction from any advance payment until a project is 50 percent complete, and then no further deduction may be withheld if the progress of the work is satisfactory. However, public owners could increase the retention back to 10 percent if the owner determines that the contractor’s work was unsatisfactory or behind schedule. Public works contracts executed before June 30, 2022 will continue to follow this model.
For public works contracts executed on or after July 1, 2022, the new law limits the amount that public owners can withhold throughout the life of a project to no more than a 5 percent deductible[3]; the law no longer provides for a reduction in the deductible when the work is 50 percent complete.[4] The flat deductible of 5 percent is welcome news for public contractors. Less retention means contractors get more from each upfront payment and this will provide contractors and subcontractors with increased cash flow throughout the life of their projects.
The new law also affects retentions held by contractors and subcontractors at their respective lower levels. Within ten days of the Contractor’s receipt of the retention of title, the Contractor shall release each subcontractor by the same percentage amount by which the Contractor’s retention was reduced.[5] Similarly, within ten days of receiving the withholding from the contractor, a subcontractor must reduce the withholding of each of its sub-subcontractors by the same percentage.[6]
Punch list retention is also affected
For construction contracts completed before June 30, 2022, public owners may withhold an amount equal to 200 percent of the value of any incomplete minor work that remains to be completed at the time of substantial completion.
The new law allows for a withholding of up to 200 percent for incomplete work after substantial completion, but removes the limitation to only minor work assignments.[7] This means that any elements that are incomplete at the time of substantial completion are subject to retention. This was probably done to prevent the parties from arguing about what work is “minor” enough to meet the retention threshold after substantial completion.
What remains unchanged
Some things remain unaffected by the new law. Owners and contractors can still choose together to release subcontractor withholding separately after their work is complete.[8] Owners are still required to substantially release the retention of title within 30 days of the completion of the work (except for their lien rights for incomplete work on the Defect List).[9] And these withholding rules still do not apply to (a) contracts issued by the Department of Transportation for road and highway repairs, and (b) public works contracts executed with public owners that do not exceed $150,000 or 45 days in duration at the time of contract award .[10]
Conclusion
Senate Bill 438, now passed, offers increased cash flow to contractors and subcontractors working on Georgia public works projects. Construction professionals are encouraged to review their contracts for public works projects from July 1, 2022 to ensure they comply with the new law. Even with private contracts, the new law can be used as a means of pressure to argue for lower deductibles.
[1] A copy of Senate Bill 438 is available here: https://www.legis.ga.gov/legislation/61647.
[2] Owner is defined as “the state, each county, local authority, agency, educational board or other public authority, public body, department, agency or political subdivision of the state”. See OCGA § 13-10-80(a)(4).
[3] OCGA § 13-10-80(b)(2)(A).
[4] ID.
[5] OCGA § 13-10-80(b)(2)(C).
[6] OCGA § 13-10-80(b)(2)(D).
[7] OCGA § 13-10-80(b)(2)(B).
[8] OCGA § 13-10-80(b)(2)(A).
[9] OCGA § 13-10-80(b)(2)(B).
[10] OCGA § 13-10-80(c)(1)-(2).
