Under New York retainage law, an owner or contractor can hold back no more than 5% of each progress payment on most construction contracts, and on private projects covered by the Prompt Payment Act that money must be released within 30 days after final approval of the work. Miss the deadline and interest runs at 1% per month. Misuse the funds and the exposure gets worse than a contract claim.
How Much Can Be Withheld
Private Projects Over $150,000
Private construction contracts above $150,000 fall under General Business Law Article 35-E, New York’s Prompt Payment Act. Section 756-c caps retainage at 5% of the contract sum by mutual agreement. A general contractor cannot retain more than 5% from a subcontractor, and no party in the chain can withhold a higher percentage than the owner actually holds back at the top.1New York State Senate. New York General Business Law 756-C – Retention Any contract term that conflicts with the Act is void.
Public Projects
Retainage on public work is governed by General Municipal Law 106-b for political subdivisions and State Finance Law 139-f for state contracts. The cap depends on bonding. When the public owner requires a performance bond and a labor and material bond in the full contract amount, retainage is limited to 5% of each progress payment. Without those bonds, the owner can retain up to 10%.2New York State Senate. New York General Municipal Law 106-B – Payment on Public Work Projects Because most sizable public contracts require full bonding, 5% is the working number on the majority of public jobs.
When Retainage Must Be Released
Private Projects: 30 Days After Final Approval
On private contracts under the Prompt Payment Act, the owner must release retainage to the contractor within 30 days after final approval of the work.1New York State Senate. New York General Business Law 756-C – Retention The clock starts at final approval, not substantial completion. Substantial completion means the project is usable for its intended purpose with only minor punch list items remaining. Final approval means all contractual work is done, including punch list items, warranties, and required documentation. Reading the contract carefully to see how it defines the trigger is worth doing before anyone starts counting days.
Public Projects: Prompt Payment After Requisition
State Finance Law 139-f does not set a specific number of days. It requires the public owner to “promptly pay” the remaining contract balance once the contractor submits a requisition after substantial completion. The owner can hold back twice the value of remaining punch list items, plus amounts needed to cover outstanding claims or liens against the contractor.3New York State Senate. New York State Finance Law 139-F – Payment on Public Work Projects After substantial completion, the owner has 45 business days to deliver a written punch list. As those items are completed, corresponding funds must be released promptly.
What Happens When Payment Is Late
Interest at 1% Per Month
Late retainage triggers automatic interest at 1% per month (or fraction of a month) on the unpaid balance. The rate applies both to owner-to-contractor payments and contractor-to-subcontractor pass-throughs. A contract can set a higher rate but not a lower one.4New York State Senate. New York General Business Law 756-B – Remedies On a $500,000 project with 5% retainage held back, that’s $250 per month on the $25,000 balance. Modest on a small job, meaningful on a large one.
Seven-Day Pass-Through Rule
Once a contractor receives payment from the owner, the contractor has seven days to pay each subcontractor the full or proportionate amount, provided the subcontractor has performed and submitted the required documentation.5New York State Senate. New York General Business Law 756-A – Obligations Miss the seven-day window and the 1% monthly interest starts running.4New York State Senate. New York General Business Law 756-B – Remedies
Right to Suspend Work
If an owner or contractor fails to approve or pay an undisputed invoice, subcontractors and contractors can suspend performance after giving at least ten calendar days’ written notice. Suspending under these circumstances is not a breach, and all contractual deadlines extend by the length of the suspension.4New York State Senate. New York General Business Law 756-B – Remedies On an active site, the threat of a work stoppage often moves a stalled payment faster than a demand letter.
Pay-When-Paid Clauses Are Void
Some general contractors try to condition payment on receiving funds from the owner. New York does not allow it. The Court of Appeals held in West-Fair Electric Contractors v. Aetna Casualty & Surety Co. that pay-when-paid clauses violate public policy because they effectively destroy a subcontractor’s right to file and enforce a mechanic’s lien under Lien Law Section 34.6Justia Law. West-Fair Electric Contractors v. Aetna Casualty and Surety Company If your subcontract makes payment contingent on the owner paying the general contractor first, that language is unenforceable.
Trust Fund Liability
Lien Law Article 3-A treats construction project funds as trust assets. Money received by an owner, contractor, or subcontractor for a project must be held in trust for laborers, subcontractors, and material suppliers with claims against that project. Under Lien Law Section 79-a, a trustee who misapplies trust funds is guilty of larceny and subject to criminal penalties under the Penal Law.7New York State Senate. New York Lien Law 79-A – Misappropriation of Funds of Trust
This is where retainage disputes can escalate beyond civil court. A general contractor who takes retainage from an owner and spends it covering overhead on a different job, rather than paying subcontractors on the project the money came from, may have committed a crime. Officers and directors of the contracting firm face personal liability for consenting to the diversion. The statute recognizes a good-faith exception for genuinely disputed claims, but the trustee must pay within 31 days once the dispute is finally resolved.
Enforcing a Retainage Claim
Mechanic’s Liens
A mechanic’s lien is often the strongest tool available to an unpaid contractor, subcontractor, or supplier. Anyone who provides labor or materials for a real property improvement can file a lien against the property.8FindLaw. New York Lien Law 3 – Mechanics Lien on Real Property Deadlines are strict: eight months from your last work or material delivery on commercial and multi-family projects, four months on single-family dwellings.9New York State Senate. New York Lien Law 10 – Filing of Notice of Lien Miss the deadline and the right is gone. Once filed, a private-project lien must be enforced through a court action within one year, or it expires.
Arbitration If the Contract Requires It
Many construction contracts require mediation or arbitration before litigation. Under CPLR 7501, a written agreement to arbitrate is enforceable, and New York courts will compel arbitration and confirm awards.10New York State Senate. New York Code CVP 7501 – Effect of Arbitration Agreement Read your contract before filing anything in court, because a judge is likely to send you back to arbitration if the contract calls for it.
Bond Claims on Public Projects
Mechanic’s liens cannot attach to government property. On public projects, subcontractors instead file claims against the payment bond required under General Municipal Law 106-b. The bond acts as a substitute for the lien right, giving unpaid subcontractors a funded source of recovery when the property itself is off limits.
Federal Projects Are a Different System
New York’s retainage rules do not govern federal construction contracts performed in the state. Those projects run on the Miller Act, which requires a payment bond on federal contracts exceeding $100,000 and replaces state lien rights as the primary protection for unpaid subcontractors and suppliers.11Office of the Law Revision Counsel. 40 USC 3131 – Bonds of Contractors of Public Buildings or Works Claims are brought in the U.S. District Court for the district where the contract is performed, on federal timelines rather than the state deadlines above.12U.S. General Services Administration. The Miller Act – How Payment Bonds Protect Subcontractors and Suppliers If your project is federal, do not assume the 5% cap or the 30-day release rule applies.