New legislation relating to retainage provisions in construction contracts was passed during the spring session of the Maryland General Assembly. Senate Bill 313, which will take effect on October 1, 2008, limits the amount of retainage that an owner or contractor can hold back to five percent (5%) of the contract price.

Currently, there is no statutory limit applicable to the amount of retainage held by an owner or contractor in a private construction contract, although a five percent (5%) limit on retainage is applicable to construction contracts with state agencies. Beginning in October, the five percent (5%) limit will be expanded to apply to any construction contract in which a contractor or subcontractor furnishes one hundred percent (100%) payment and performance security. The bill also provides that the amount of retainage held back in a contract between a contractor and subcontractor may not exceed the amount retained in the contract between the owner and contractor. There is, however, an exception to the limit: more than five percent (5%) may be retained if warranted by the contractor or subcontractor’s performance under the contract.

The provisions of SB 313 will not affect contracts which were executed prior to October 1, 2008 and are not applicable to contracts for less than $250,000 or which are funded in whole or in part through the Maryland Department of Housing and Community Development. Going forward, we encourage you to incorporate this limit on retainage into all applicable contracts.

View the full SB 313 here.

If you wish to discuss any of the issues raised by SB 313 or want to talk about how the SB 313 will affect your contracts, please contact Real Estate and Business Transactions lawyer Alison Lambert at 410 347 1348 or alambert@gejlaw.com.