Alabama Retainage Guide and FAQs

(a) When a contractor has performed pursuant to his or her contract and submits an application or pay request for payment or an invoice for materials, to the owner or owner’s representative, the owner shall timely pay the contractor by mailing via first class mail or delivering the amount of the pay request or invoice in accordance with the payment terms agreed to by the owner and the contractor, the agreed upon payment terms must be specified in all contract documents, but if payment terms are not agreed to, then within 30 days after receipt of the pay request or invoice.

(b) When a subcontractor has performed pursuant to his or her contract and submits an application or pay request for payment or an invoice for materials to a contractor in sufficient time to allow the contractor to include the application, request, or invoice in his or her own pay request submitted to an owner, the contractor shall timely pay to the subcontractor in accordance with the payment terms agreed to by the contractor and subcontractor, but if payment terms are not agreed to, then within seven days of receipt of payment from owner by mailing via first class mail or delivering the amount received for the subcontractor’s work and materials based on work properly completed or service properly provided under the contract.

(c) When a sub-subcontractor has performed labor or supplied materials for a subcontractor pursuant to his or her contract and submits an application or pay request for payment or an invoice for materials to a subcontractor in sufficient time to allow the subcontractor to include the application, request, or invoice in his or her own pay request submitted to a contractor, the subcontractor shall timely pay the sub-subcontractor in accordance with the payment terms agreed to by the subcontractor and sub-subcontractor but if payment terms are not agreed to, then within seven days of receipt of payment from contractor by mailing via first class mail or delivering the amount received for the sub-subcontractor’s work and materials based on work properly completed or service properly provided under the contract.

(d) If the owner, contractor, or subcontractor does not make payment in compliance with this chapter, the owner, contractor, or subcontractor shall be obligated to pay his or her contractor, subcontractor, or sub-subcontractor interest at the rate of one percent per month (12% per annum) on the unpaid balance due.

(e) A contractor who receives a payment under subsection (a) or otherwise, from an owner in connection with a contract shall pay each of its subcontractors the portion of the owner’s payment to the extent of that subcontractor’s interest in the owner’s payment. The payment shall include interest, if any, that is attributable to work properly performed or materials suitably stored by that subcontractor if payment for stored materials is provided for in the contract. The payment required by this subsection shall be made not later than the seventh day after the date the contractor receives the owner’s payment.

(f) The percentage of retainage on payments by the contractor to the subcontractor shall not exceed the percentage of retainage on payments made by the owner to the contractor. Any percentage of retainage on payments made by contractor to the subcontractor that exceeds the percentage of retainage on payments made by the owner to the contractor shall be subject to interest to be paid by the contractor to the subcontractor at the rate of one percent per month (12% per annum).

(g) The percentage of retainage on payments by the subcontractor to the sub-subcontractor shall not exceed the percentage of retainage on payments made by the contractor to the subcontractor. Retainage on payments made by the subcontractor to the sub-subcontractor that exceeds the percentage of retainage on payments made by the contractor to the subcontractor shall be subject to interest paid at the rate of one percent per month (12% per annum).

(h) For the purposes of this chapter, retainage means that money, or other security as agreed to by the parties to a construction contract, earned by the contractor, subcontractor or lower tier sub-subcontractor, or supplier for work properly performed or materials suitably stored if payment for stored materials is provided for in the contract, which has been retained by the owner conditioned on final completion and acceptance of all work in connection with a project or projects by the contractor, subcontractor or lower tier sub-subcontractor, or supplier.

(i) A construction contract on any project in this state may provide for the owner’s withholding of retainage from payments to its contractor for work performed by that contractor on a construction project. There shall be retained not more than 10 percent of the estimated amount of work properly done and the value of materials stored on the site or suitably stored and insured off-site, and after 50 percent completion has been accomplished, no further retainage shall be withheld. If an owner withholds an amount greater than that allowed by this subsection, the owner shall be liable to the contractor for interest accruing on the excess amount withheld at the rate of one percent per month. Nothing herein is intended to limit or alter the paying party’s right to withhold or not approve payment on grounds set forth in the parties’ contract or the grounds set forth in Section 8-29-4 or otherwise for work not properly performed or payment not earned; rather, this section is intended only to establish a maximum amount of retainage, establish the timing for release of retainage, and provide for the payment of interest for improperly held retainage.

(j) A construction contract on any project in this state may provide for the contractor’s withholding of retainage from payments to its subcontractors for work performed by the subcontractors on a construction project. There shall be retained not more than 10 percent of the estimated amount of work properly done and the value of materials stored on the site or suitably stored and insured off-site, and after 50 percent completion has been accomplished, no further retainage shall be withheld. If a contractor withholds an amount greater than that allowed by this subsection, the contractor shall be liable to the subcontractor for interest accruing on the excess amount withheld at the rate of one percent per month.

(k) A construction contract on any project in this state may provide for the subcontractor’s withholding of retainage from payments to its sub-subcontractors or material suppliers for work performed by such sub-subcontractors or material suppliers on a construction project. There shall be retained not more than 10 percent of the estimated amount of work properly done and the value of materials stored on the site or suitably stored and insured off-site, and after 50 percent completion has been accomplished, no further retainage shall be withheld. If a subcontractor withholds an amount greater than that allowed by this subsection, the subcontractor shall be liable to the sub-subcontractor or material supplier for interest accruing on the excess amount withheld at the rate of one percent per month.

(l)

(1) The owner shall release and pay retainage to the contractor for work completed on any construction contract no later than 60 days after the completion of the contractor’s work defined in its contract with the owner, or no later than 60 days after substantial completion of the project, whichever occurs first, and in both events, with all necessary certificates of occupancy having been issued. The contractor shall release and pay retainage to its subcontractors for work completed pursuant to the terms of this chapter.

(2) For the purposes of this subsection, substantial completion means the stage in the progress of the project when the project or designated portion thereof is sufficiently complete in accordance with the contract documents with all necessary certificates of occupancy having been issued so that the owner may occupy or utilize the project for its intended purpose.

(m) The provisions of subsections (h) through (l) shall not apply to any construction project for or by an electric utility regulated by the Public Service Commission.

(n) Nothing herein limits or alters the paying party’s right to withhold or not approve payment on grounds set forth in the party’s contract or the grounds set forth in Section 8-29-4 or otherwise for work not properly performed or payment not earned; rather, this section is intended only to establish a maximum amount of retainage, establish the timing for release of retainage, and provide for the payment of interest for improperly held retainage. Also, the paying party may condition payment on the receipt of a full release of any lien of the contractor, subcontractor, or sub-subcontractor for the amount of work being paid.

(o) All loans and loan proceeds related to a construction project, and the disbursement and use thereof, are governed solely by the terms of the documents evidencing and securing the loan, and contractors, subcontractors, and sub-subcontractors have no lien or rights in any such loan, loan proceeds, or the disbursement or use thereof.

(a) Whenever the State of Alabama is a party to any contract, the contract shall be executed by all parties in a timely fashion. When a party to a contract, other than the state, has fully executed the responsibility under the contract and there remains only the payment of funds by the state, payment shall be made in a timely manner. If the amount due by the state is not in dispute, payment shall be made within 30 days after the other party has completed his or her portion of the contract and presented a proper invoice. If the amount payable is not paid within 30 days, interest on the amount shall be charged. A party who receives a payment from the state in connection with a contract shall pay each of its subcontractors or sub-subcontractors the portion of the state’s payment to the extent of that subcontractor’s or sub-subcontractor’s interest in the state’s payment in accordance with the payment terms agreed to by the contractor and the subcontractor, but if payment terms are not agreed to, then within seven days after receipt of payment from the state. The payment shall include interest, if any, that is attributable to work performed by the subcontractor or sub-subcontractor. The interest rate shall be the legal amount currently charged by the state. Interest shall be paid from the same fund or source from which the contract principal is paid. Nothing in this subsection shall prevent the state, contractor, or subcontractor from withholding payments if there is a bona fide dispute over one or more of the following:

(1) Unsatisfactory job progress.

(2) Defective construction not remedied.

(3) Disputed work.

(4) Third party claims filed or reasonable evidence that a claim will be filed.

(5) Failure of the contractor, subcontractor, or sub-subcontractor to make timely payments for labor, equipment and materials.

(6) Property damage to owner, contractor, or subcontractor.

(7) Reasonable evidence that the contract, subcontract, or sub-subcontract cannot be completed for the unpaid balance of the contract or contract sum.

(b) In the event that there is a bona fide dispute over all or any portion of the amount due on a progress payment from the owner, contractor, or subcontractor then the owner, contractor, or subcontractor may withhold payment in an amount not to exceed two times the disputed amount.

(c) An owner is required to notify a contractor in writing within 15 days of receipt of any disputed request for payment. A contractor, subcontractor, and sub-subcontractor is required to provide written notification within five days of disputed request for payment or notice of disputed request for payment.

(d) The amount of retainage withheld by the contractor to the subcontractor or the subcontractor to the sub-subcontractor shall not exceed the retainage withheld by the state unless interest is applied to the withheld amount.

(a) As used in this section the following words shall have the meanings ascribed to them as follows:

(1) CONTRACTOR. Any natural person, partnership, company, firm, corporation, association, limited liability company, cooperative, or other legal entity licensed by the Alabama State Licensing Board for General Contractors.

(2) NONRESIDENT CONTRACTOR. A contractor which is neither a. organized and existing under the laws of the State of Alabama, nor b. maintains its principal place of business in the State of Alabama. A nonresident contractor which has maintained a permanent branch office within the State of Alabama for at least five continuous years shall not thereafter be deemed to be a nonresident contractor so long as the contractor continues to maintain a branch office within Alabama.

(3) RETAINAGE. That money belonging to the contractor which has been retained by the awarding authority conditioned on final completion and acceptance of all work in connection with a project or projects by the contractor.

(b)

(1) Unless otherwise provided in the specifications, partial payments shall be made as the work progresses at the end of each calendar month, but in no case later than 35 days after the acceptance by the awarding authority that the estimate and terms of the contract providing for partial payments have been fulfilled. The contract between the contractor and the awarding authority shall designate a person to review the progress of completed work and to review documents submitted by the contractor as provided in this section. Except as otherwise provided for the Department of Transportation, the designated person, within 10 days, shall review the submission and respond in writing to accept or forward, as provided in this subsection, a request for payment. For contracts involving the Department of Transportation, the time frame for review and response shall be 20 days. In the event of an error in the submission or a dispute regarding compliance with the provisions of the contract, the error or dispute shall be disclosed in writing to the contractor within 10 days and, after corrective actions are taken, the invoice may be resubmitted and shall be addressed as provided in this section; provided that for contracts involving the Department of Transportation, the time frame for review and response shall be 20 days. In the absence of error or dispute, the awarding authority shall proceed within 10 days as follows for payment of the invoice:

a. For contracts subject to subsection (l), the awarding authority shall forward the request for payment to the entity or agency that is the source of funding to be used by the contractor.

b. For contracts not subject to subsection (l), the payment shall be made by the contracting agency in accordance with the payment requirements and deadlines established in this section.

(2) In preparing estimates, the material delivered on the site, materials suitably stored and insured off-site, and preparatory work done may be taken into consideration. If the amount due by the awarding authority is not in dispute and the amount payable is not paid within the above 35-day period, the contractor to whom payment is due shall also be entitled to interest from the awarding authority at the rate assessed for underpayment of taxes under Section 40-1-44(a), on the unpaid balance due. Any agreement to increase the 35-day period for payment after the execution of the contract is not enforceable. Interest payments shall not be due on payments made after the 35-day period because of administrative or processing delays at the close of the fiscal year or delays resulting from official and announced closures by the awarding authority. The provisions in this subsection shall not apply to contracts administered by the Alabama Building Commission, regardless of the source of the funds to be utilized to fulfill the awarding authority’s obligation under the contract.

(c) In making the partial payments, there shall be retained not more than five percent of the estimated amount of work done and the value of materials stored on the site or suitably stored and insured off-site, and after 50 percent completion has been accomplished, no further retainage shall be withheld. The retainage as set out above shall be held until final completion and acceptance of all work covered by the contract unless the escrow or deposit arrangement described in subsections (f) and (g) is utilized. Provided, however, no retainage shall be withheld on contracts entered into by the Alabama Department of Transportation for the construction or maintenance of public highways, bridges, or roads.

(d) In addition to other requirements, a nonresident contractor shall satisfy the awarding authority that he or she has paid all taxes due and payable to the State of Alabama or any political subdivision thereof prior to receiving final payment for contract work. When maintenance periods are included in the contract covering highways and bridges or similar structures, the periods shall be considered a component part of the contract. On completion and acceptance of each separate building, public work, or other division of the contract on which a price is stated separately in the contract or can be separately ascertained, payment may be made in full, including the retained percentage thereof, less authorized deductions. Nothing in this section shall be interpreted to require the awarding authority to make full payment on an item of work when the item of work is an integral part of a complete improvement.

(e) In lieu of the retained amounts provided for in subsection (c) of this section, the awarding authority may provide in the specifications or contracts an alternate procedure for the maintenance of an escrow account as provided in subsection (f) or the depositing of security as provided in subsection (g).

(f) An escrow account, established pursuant to an escrow agreement, shall be entered into only on the following conditions:

(1) If the contractor shall have entered into more than one construction contract allowing for the maintenance of escrow accounts, the contractor may elect to combine the amounts held in lieu of retainage under each contract into one or more escrow accounts or may elect to establish a separate escrow account for each contract.

(2) Only state or national banks chartered within the State of Alabama or savings and loan associations domiciled in the State of Alabama may serve as an escrow agent.

(3) The escrow agent must limit the investment of funds held in escrow in lieu of retained amounts provided for in subsection (c) of this section to savings accounts, certificates of deposit or similar time deposit investments (which may, at the election of the contractor, be in an amount in excess of the maximum dollar amount of coverage by the Federal Deposit Insurance Corporation, the Federal Savings & Loan Insurance Corporation, or other similar agency), U.S. Treasury Bonds, U.S. Treasury Notes, U.S. Treasury Certificates of Indebtedness, U.S. Treasury Bills, bonds or notes of the State of Alabama or bonds of any political subdivision of the State of Alabama.

(4) As interest on all investments held in escrow becomes due, it shall be collected by the escrow agent and paid to the contractor.

(5) The escrow agent shall periodically acknowledge to the awarding authority and contractor the amount and value of the escrow account held by the escrow agent, and any additions to the escrow account by the awarding authority shall be reported immediately to the contractor. Withdrawals from the escrow account shall only be made subject to the written approval of the awarding authority.

(6) Upon default or overpayment, as determined by the awarding authority, of any contract or contracts subject to this procedure, and upon the written demand of the awarding authority, the escrow agent shall within 10 days deliver a cashier’s check to the awarding authority in the amount of the escrow account balance (subject to the redemption value of such investments at the time of disbursement) relating to the contract or contracts in default.

(7) The escrow account may be terminated upon completion and acceptance of the contract or contracts as provided in subsections (c) and (i) of this section.

(8) All fees and expenses of the escrow agent shall be paid by the contractor to the escrow agent and if not paid shall constitute a lien on the interest accruing to the escrow account and shall be paid therefrom.

(9) The escrow account shall constitute a specific pledge to the awarding authority, and the contractor shall not, except to his or her surety, otherwise assign, pledge, discount, sell, or transfer his or her interest in the escrow account, the funds in which shall not be subject to levy, garnishment, attachment, or any other process whatsoever.

(10) The form of the escrow agreement and provisions thereof in compliance herewith, as well as such other provisions as the awarding authority shall from time to time prescribe, shall be subject to written approval of the awarding authority. The approval of the escrow agreement by the awarding authority shall authorize the escrow agent to accept appointment in such capacity.

(11) The awarding authority shall not be liable to the contractor or his or her surety for the failure of the escrow agent to perform under the escrow agreement, or for the failure of any financial institution to honor investments issued by it which are held in the escrow account.

(g) The contractor may withdraw the whole or any part of the retainage upon deposit of securities only in accordance with the following procedures:

(1) The contractor shall deposit with the State Treasurer or the municipal or county official holding funds belonging to the contractor, the following readily negotiable security or any combination thereof in an amount at least equal to the amount withdrawn, the security shall be accepted at the time of deposit at market value but not in excess of par value:

a. U.S. Treasury Bonds, U.S. Treasury Notes, U.S. Treasury Certificates of Indebtedness, or U.S. Treasury Bills.

b. Bonds or notes of the State of Alabama.

c. Bonds of any political subdivision of the State of Alabama.

d. Certificates of deposit issued by the Federal Deposit Insurance Corporation insured banks located in the State of Alabama. The certificates shall be negotiable and only in an amount not in excess of the maximum dollar amount of coverage by the Federal Deposit Insurance Corporation.

e. Certificates of deposit issued by savings and loan associations located in the State of Alabama, the accounts of which are insured by the Federal Deposit Insurance Corporation or the accounts of which are insured by a company approved by the state Savings and Loan Board and the certificates shall be made payable with accrued interest on demand. Any certificate from any of the savings and loan associations referred to in this paragraph shall not be for an amount in excess of the maximum dollar amount of coverage of the Federal Deposit Insurance Corporation.

(2) The agency or department of the state having jurisdiction over any public works contract shall notify the State Treasurer of the amount of the deposit required and shall also notify the State Treasurer when to release the deposit.

(3) The architect or engineer representing any municipality or county or the chair of any board, commission, or agency of any municipality or county shall notify the municipal or county official of the amount of deposit required and shall also notify the municipal or county official when to release the deposit.

(4) At the time of deposit of any security, the security may be endorsed and shall be accompanied by a conditional assignment to the public body designated as owner in the contract document, which assignment shall empower the State Treasurer, or the municipal or county official to negotiate the security at any time to the extent necessary to cause the fulfilling of the contract.

(5) Any interest or income due on any security deposited shall be paid to the contractor. If the deposit is in the form of coupon bonds, the coupons, as they respectively become due, shall be delivered to the contractor.

(6) In the event the contractor defaults in the performance of the contract or any portion of the contract, the securities deposited by the contractor in lieu of retainage and all interest, income, and coupons accruing on the securities, after default, may be sold by the state or any agency or department of the state, any municipality or county, or any board, commission, or agency of the municipality or county and the proceeds of the sale shall be used as if the proceeds represented the retainage provided for under the contract.

(h) All material and work covered by partial payments made shall become the sole property of the awarding authority, but the contractor shall not be relieved from the sole responsibility for the care and protection of materials and work upon which payments have been made, and for the restoration of any damaged work.

(i)

(1) Upon the contractor’s completion and the awarding authority’s acceptance of all work required, the awarding authority shall pay the amount due the contractor upon the contractor’s presentation of the following items:

a. A properly executed and duly certified voucher for payment.

b. A release, if required, of all claims and claims of lien against the awarding authority arising under and by virtue of the contract, other than such claims of the contractor, if any, as may be specifically excepted by the contractor from the operation of the release in stated amounts to be set forth therein.

c. Proof of advertisement as provided by law. Upon proof of advertisement, the prescribed terms of payment shall not be amended after the terms and specifications have been published.

(2) Such payment shall become due and owing 35 days after all the requirements of subdivision (1) are fulfilled, and any agreement to increase the 35-day period for payment after the execution of the contract is not enforceable. If the amount payable is not paid as required, interest on the amount shall be due and owing to the contractor. Interest shall accrue on the day following the later date described above and shall be paid from the same fund or source from which the contract principal is paid. The interest rate for payments shall be the legal amount currently assessed for under payment of taxes under Section 40-1-44 (a).

(3) Except as may be prohibited by Article I, Section 14 of the Constitution of Alabama of 1901, a contractor or awarding authority may file a civil action against the party contractually obligated for the payment or repayment claimed to recover the amount due plus the interest accrued in accordance with this chapter. In addition to the payment of any amounts due plus interest, if applicable, the court shall award the prevailing party reasonable attorneys’ fees, court costs, and reasonable expenses. This provision shall not apply to contracts administered by the Alabama Building Commission, regardless of the source of the funds to be utilized to fulfill the awarding authority’s obligation under the contract.

(j) If the Department of Transportation or a county awarding authority shall determine that there has been overpayment to a contractor on a contract award pursuant to this chapter, the Department of Transportation or the county awarding authority shall provide written notice of the overpayment to the contractor and the contractor shall remit the overpayment to the Department of Transportation or the county awarding authority within 60 days of receipt of the demand. If the contractor fails to remit payment in full of the overpayment within 60 days of receipt of demand, the contractor shall be disqualified from bidding as a prime contractor or from performing work as a subcontractor on any future Department of Transportation contract or county contract for the construction or maintenance of public highways, bridges, or roads until the overpayment is made. The Department of Transportation or county awarding authority shall also be entitled to interest from the contractor at the rate assessed for under payment of taxes under Section 40-1-44 (a) beginning on the 61st day after the contractor’s receipt of demand.

(k) The contract between the awarding authority and contractor shall contain provisions outlining the source of sufficient funds to be utilized to fulfill the awarding authority’s obligations under the contract, including whether the funds are held by the awarding authority at the time of the execution of the contract or whether the funds will become available at a date following the execution of the contract.

(l) Should the source of funds for the payment be a grant, award, or direct reimbursement from the state, federal government, or other source which will not become available until after the execution of the contract, this shall be disclosed in the bid document and contract and the provisions of this chapter regarding prompt payment shall not apply until the awarding authority is in receipt of the funds as provided in the contract. Upon such receipt, the contracting agency shall process payment within 10 days and the requirement shall be enforceable as provided herein.

(m) In the event of a conflict between the provisions of this section and the provisions of any other section of the Code of Alabama 1975, or any agency’s or department’s rules, regulations, or manuals, this section shall govern.

(n) The provisions of this section shall not apply to any state agency established pursuant to Chapter 1 of Title 33.

(o) The payment provisions of this section shall not apply to contracts entered into by governmental entities as a result of response and recovery to any of the conditions described in Section 31-9-2(a) or as a result of any other disaster event.

(p) The provisions set forth in this section shall apply to all payments, partial or otherwise.