On March 23, 2016, the court of appeal for the Second District of California held that a prime contractor's obligation to pay retainage does not arise until the prime contractor receives retainage payments from the project owner (Blois Constr., Inc. v. FCI/Fluor/Parsons (2016) 245 Cal.App.4th 1091).

In 2006 the Exposition Metro Line Construction Authority (Expo) hired FCI/Fluor/Parsons (FFP) to serve as the prime contractor on the construction of a light rail line connecting Los Angeles with Culver City and Santa Monica. Blois Construction contracted with FFP to serve as a subcontractor on the project.

Both the prime contract and the subcontract allowed for 10% of each progress payment to be retained pending successful completion of the work. The general contract also contained a provision allowing Expo to stop retentions after 50% of the work was completed to its satisfaction.

In December of 2009, after a request from FFP, Expo stopped withholding retainage from subsequent progress payments. It did not release the previously withheld retainage until May 30, 2014.

Blois brought suit against FFP under California's Prompt Payment act (Cal.Pub.Cont.Code § 7107) which requires a general contractor to release retainage to its subcontractor within seven days after receipt of retainage from the project owner. Blois claimed that FFP should have released retainage in December 2009 (as soon as Expo stopped withholding additional retainage). The trial court ruled in favor of FFP and Blois appealed.

The appellate court affirmed the trial court's decision. The court explained that the goal of prompt payment legislation is to ensure that subcontractors do not have to wait significantly longer than general contractors to receive flow down of their payment. Therefore, the California Prompt Payment act requires prime contractors to pay subcontractors the retainage owed upon receipt of retainage from the owner, but not earlier than that.

The court found that when Expo ceased withholding retainage in 2009 it wasn’t paying funds previously withheld as retainage, such that would trigger application of the Prompt Payment act. Instead, Expo was simply paying FFP the total amount due for each subsequent progress payment. Since no funds were paid as release of retainage, the Prompt Payment act did not apply. FFP was only responsible for paying retainage to Blois once it received payment of retainage from Expo in 2014.

Almost all states have enacted Prompt Payment acts to protect prime and lower-tier subcontractors by requiring that payment be made within a specific time period (often a certain number of days after submission of a complete payment requisition). This decision is important because it highlights an important statutory distinction between releasing retainage and reducing the amount of money withheld as retainage. Under the California statute, and potentially others, a subcontractor should only expect release of retainage after the prime contractor actually receives the retainage from the project owner.

For more information on payment requirements in construction contracts, see: