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Sureties to the Rescue: Maintenance Bonds Suggested As Remedy to Allow for Timely Release of Retainage

9/20/2016 | Construction Blog

The Pennsylvania state legislature has spent considerable time over the last 2-3 years addressing issues in the construction industry. One of the more recent changes under consideration are amendments to the Pennsylvania Contractor and Subcontractor Payment Act. This statute, which is designed to ensure prompt payment on private projects in Pennsylvania, contains a number of provisions that are in need of update. At least one of the proposed changes will have a direct impact on the surety industry.

pennsylvania-state-capital-buildingA primary complaint by many subcontractors is the length of time they have to wait to receive payment of their retainage. Those who complete their work towards the beginning of a project – for example, site contractors – are sometimes forced to wait months for the project to be completed in order to be paid retainage. On large projects, this can be many months; and depending on the value of the contract, the retainage can represent most or all of the subcontractors profit on the job. The legislature has decided to try to tackle this issue as part of its amendments.

The current proposal would insert surety companies directly into the breach. In effect, a subcontractor wishing to obtain release of its retainage before project completion would be permitted to do so if a maintenance bond is posted to protect the general contractor and owner for any possible defects in the work of that subcontractor. This, in theory, works because the maintenance bond replaces retainage as the security for defective work. In some circumstances, it might even provide more security by extending coverage for defective work beyond the completion of the punch list and offering security from a third party that warranty work will be done. For this reason, it is not hard to see owners and contractors beginning to mandate this solution in their contract documents.

This amendment has not yet been passed by the state legislature. There seems to be general consensus in the industry on most of the changes to the law at this point though, so it may only be a matter of timing. Once passed, the surety industry will have both a market opportunity and a new and unique potential risk to assess.