A measure aimed at easing the financial strain on construction contractors has gained traction in the Indiana legislature. House Bill 1033 has now passed through a Senate committee and will move to the Senate floor for further consideration.

The bill, which seeks to establish a uniform, maximum amount of retainage for certain state and local public works projects, is designed to reduce the financial burden on contractors. Retainage refers to the portion of a contractor’s payment that is withheld until a construction project reaches substantial or full completion.

Currently, Indiana law requires a retainage of 6% to 10% of the agreed contract price to be withheld until the project is halfway complete. A second option allows 3% to 5% of the final payment to be retained until the project is substantially finished. However, these rules do not currently apply to private construction projects.

Under the proposed bill, authored by Republican Rep. Jim Pressel, the minimum retainage requirement would be removed for public projects, and the maximum percentage of withheld payments would be reduced by 4% for both retainage options:

• From 10% to 6% of the completed work until the project is halfway done.
• From 5% to 3% of the completed work until the project is substantially complete.

The Indiana Senate Pensions and Labor Committee approved the bill unanimously on Wednesday, following an 84-1 vote in the House.

Rep. Pressel explained that the goal of the bill is to ease cash flow issues for contractors, particularly those whose work is completed months or even years before the entire project finishes. "If I’m the excavator, or one of the first guys, current law allows up to about 10% of my final payment to be withheld. So, I have to wait for those dollars until the job is substantially completed," Pressel said. "The policy question is, is that the right amount that should be withheld from that contract?"

Retainage is a standard practice in construction contracts, meant to ensure that contractors complete their work as specified and provide leverage to resolve disputes over incomplete or defective work. However, Pressel and some business representatives argue that excessive retainage can severely impact cash flow, especially for smaller contractors who often finance the work between payments.

"Contractors making 50% on a project is pure myth. It doesn’t happen. Some of the small operators typically work on a 3% net margin, and in some instances, they could have that amount withheld for maybe a year. If it’s a large project, it could be two years," Pressel said.

The bill specifically applies to state and local public works projects exceeding $200,000, such as government buildings, schools, utilities, and municipal infrastructure. Projects related to highways, roads, streets, alleys, bridges, and similar structures are excluded.

"If I’m that excavator, if I’m that foundation guy, and I performed my service — it’s been inspected, and I no longer have anything to do with the project — good policy would dictate that you should be paid 100%, right?" Pressel said. "Why are you being held up with what could potentially be all of your profit? And if you have multiple jobs going on … $50,000 sitting in retainage on this job, and $50,000 on this job, and $50,000 on that job, I may never see my potential profit until I retire."

Initial versions of the bill proposed to apply retainage limits to both public and private projects. However, an amendment passed in the House limited the bill’s scope to public works projects.

Industry representatives voiced support for the bill. Dax Denton, chief policy officer for the Indiana Bankers Association, stated that the narrowed focus "strikes a good balance." Jake German, representing the National Fire Sprinkler Association, added, “This makes sure there’s still protection and still retainage in place, but allows these guys to get paid more of what they’re owed so they can move on to the next one.”

German further explained that rising project costs since the COVID-19 pandemic prompted the need for change. “Well, 10% of $100,000 is less than 10% of a million dollars, and as prices have gone up, the retainage has been at that high level of 10%, and that’s just costing and requiring these guys to have more money held back,” German said.

Steve Kovecsi from Ryan Fireprotection in Noblesville highlighted the burden of excessive retainage on contractors. He shared that his company has $5.9 million in retainage still unpaid, much of it tied to projects that are nearly or fully complete. "We hear things like, ‘We have to wait for the grass to grow. We’re waiting for the painters to come in. We have to wait for the tile guys to come in and finish tiling,'” Kovecsi said. "All the while, we still cannot get our money."

House Bill 1033, if passed, could have a significant impact on the construction industry in Indiana by improving cash flow for contractors and reducing the financial strain caused by excessive retainage.

Originally reported by Casey Smith in WFFT - TV.