House Bill 1033, introduced and pending in the 2025 Session of the Indiana General Assembly, proposes establishing a uniform maximum amount of retainage for private construction projects and certain state and local public works projects.
Background
Most construction contracts provide for periodic payments from the owner of the project to the prime or general contractor as the work progresses. For time-and-material (or “T&M”) projects, the general contractor submits invoices for the labor and materials expended since the last periodic payment. For fixed-price projects, the contractor typically invoices for a prorated portion of the fixed price based on the percentage of the work that has been completed. Either way, most construction contracts permit the owner of the project to withhold a certain percentage of the invoiced amount, called retainage or retention, until all the work is completed.
This practice aims to:
- Provide financial motivation for contractors to finish the work.
- Protect project owners by ensuring funds are available to address issues.
While beneficial for owners, excessive retainage can strain contractors’ cash flow, who often spend their own money to pay for the work between periodic payments. If the retention is unfairly large, it can adversely affect the general contractor’s ability to pay workers, suppliers, and subcontractors and to manage ongoing projects.
The contractor and the owner negotiate the payment terms, including retainage, and incorporate them into the construction contract. The amount of retainage depends on several factors, including the type of construction and local customs.
Some states have statutes that regulate retention, sometimes for public projects, sometimes private, and sometimes both. With respect to certain public contracts, Indiana law currently provides the following options for withholding;
- No less than 6% and no more than 10% of the dollar value of all work satisfactorily completed until the work is 50% complete, and nothing more after that;
or
- No less than 3% and no more than 5% of the dollar value of all work satisfactorily completed until the work is substantially complete.
Indiana law does not currently regulate retention for private construction projects.
House Bill 1033
HB 1033, authored by Rep. Jim Pressel (R – District 20) of LaPorte County and co-authored by Rep. Doug Miller (R – District 48) of Elkhart County, would change the retention restrictions on retainage for public projects and create new restrictions for private projects.
With respect to public projects, HB 1033 amends Ind. Code Sections 5-16-5.5-3.5 and 36-1-12-14 to eliminate the minimum retention requirements, leaving only the maximum limits.
HB 1033 would also create a new chapter in the Indiana Code beginning at Section 22-5-9-1 that would limit retainage provisions in private construction contracts by requiring them to comply with one of the following:
- Retainage from payments to a contractor or subcontractor may not exceed:
- 10% of the dollar value of all work satisfactorily completed, if the work is less than 50% complete; and
- 0%, if the work is at least 50% complete;
or
- Retainage from payments to a contractor or subcontractor may not exceed 5% of the dollar value of all work satisfactorily completed until substantial completion of the work.
In sum, HB 1033 harmonizes the retainage restrictions on public and private contracts. In either situation, the total retainage may not exceed 5% of the total dollar value of the complete project, and the 5% may be collected either
- Uniformly, at 5% throughout the project; or
- Front-loaded, at 10% for the first half of the project and no more after that.
No construction contracts, public or private, are required to include retainage provisions.
Scope of Private Contracts Subject to Retention Restrictions
If the bill were to pass, the statute would apply to private contracts:
- Between;
- An owner; and
- A prime or general contractor or subcontractor.
or
- Between;
- A prime or general contractor; and
- A subcontractor.
The bill does not address contracts between two subcontractors, even though there is no obvious reason to exclude them, leaving uncertainty how courts may interpret the statute.
The restrictions on private contracts would apply not only to contracts for new construction, but also to contracts for alteration, renovation, repair, or demolition of building structures; installation of fixtures or equipment; and to excavation, site work, and landscaping.
They would not apply to contracts with:
- Persons who supply materials but no labor;
- Architects, engineers, or land surveyors; or
- Other professionals who provide services or studies related to the design or the feasibility of a building, structure, or improvement
The latter exclusion excludes, for example, contracts with consultants who render advice on environmental, health, and safety regulations applicable to the building, structure, or improvement, whether the consultant is trained or licensed as an architect, engineer, or surveyor. It does not appear to exclude contracts with consultants who render advice related to, for example, OSHA regulations that apply to the contractors themselves. Even so, the issue of professional service contracts may be largely academic because they generally do not include retention requirements.
If HB 1033 passes, the construction industry will likely require some time to assimilate the new restrictions. The business lawyers at Harshman Ponist Smith & Rayl, LLC can help construction owners, contractors, and professionals navigate the uncharted territory.