Procurement

Retainage on Federal Contracts

Issue
Based on ACEC and industry initiatives, the Small Business Administration’s Office of Advocacy announced in February, 2008 that it was undertaking an initiative to reform or eliminate the withholding of retainage fees on federal architectural and engineering contracts.

Retainage is a practice followed by federal agencies in which a percentage of payment—typically ten percent—is withheld from a federal contractor. In some instances, the retainage fee is not released until the related project has been completed. On a large construction project, a firm that provided preliminary engineering services on a federal project may be required to wait several years—well after its services and the terms of its contract have been met—before being paid in full for their services. Withholding retainage essentially requires engineering firms to provide an interest free loan to the federal government and can have a negative affect on a firm’s cash flow, especially in smaller firms.

Furthermore, firms that serve as subcontractors on a federal project typically have retainage withheld by the prime contractor on their portion of the work. This practice creates an additional accounting burden on subcontractors by requiring them to “check-in” with the prime contractor on a regular basis to inquire whether the prime has been paid in full.

The retainage issue was recommended for review as part of the SBA’s Regulator Review and Reform Initiative (r3), which was established by the Office of Advocacy to identify issues for federal agency review to determine if they are outdated, ineffective, duplicative, or overly complex. As part of the 2008 r3 initiative, the Office of Advocacy requested that the Federal Acquisition Regulation (FAR) Council review the practice of withholding retainage fees and reduce their impact on A/E firms. Specifically, SBA recommended that the FAR Council remove retainage requirements or reduce them to five percent. The issue was elevated to the r3 2009 “Top 10 Rules for Review and Reform.” On January 9, 2009, the FAR Council sent a proposed rule removing retainage requirements to the Office of Federal Procurement Policy for approval.

ACEC Position
ACEC supports the full repeal of retainage fees on federal engineering contracts or changes to retainage practices that allow engineering firms to be paid in a timely manner upon completion of their services. ACEC awaits publication of the new rule and stands ready to respond to any measure taken that falls short of removing retainage requirements.