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Retainment of Public Improvement Payments

Code of Iowa Chapter 573 provides the laws on how the retainment of payments to those who furnish labor and materials for a public improvement project is to be done. The city’s role in that process is clearly specified as it must retain from each monthly payment to the principal contractor not more than five percent of that amount which is determined to be due according to the estimate of the architect or engineer. The retained percentage of the contract price constitutes a fund for the payment of claims for materials furnished and labor performed on the improvement and shall be held and disposed of by the city.

Claims for Payment

Cities should have a procedure for acknowledging the receipt of valid claims for payment. Any person, firm or corporation who has, under a contract with the principal contractor or with subcontractors, performed labor, or furnished material, service or transportation, in the construction of a public improvement may file a claim. The claim must be filed with the officer, board or commission authorized by law to let contracts for such improvement, and the claim must be itemized, sworn and written. If the purported claim fails to satisfy each of these criteria, it must be rejected.

The city should designate an officer to receive such claims and that officer must sign every claim they receive, noting the date and hour of the filing. The city should also mail, via certified mail, a copy of the claim and its letter acknowledging the date and hour of its receipt to the contractor who filed the claim, the principal contractor, the surety on the project, as well as the project architect, engineer and construction manager.

Claims may be filed at any time before the expiration of 30 days immediately following the completion and final acceptance of the improvement and at any time after the 30 day period, if the city has not paid the full contract price and no action is pending to adjudicate rights in and to the unpaid portion of the contract price. Completion and final acceptance must be distinguished from “substantial completion” because the period for filing claims and, if necessary, commencing litigation over the retained funds flows from the city’s final acceptance of the public improvement, not substantial completion. According to Code Chapter 26, “substantial completion” means the first date when the architect or engineer certifies that the work is substantially completed in principal accordance with the terms of the contract so that the city can occupy or utilize the public improvement for its intended purpose.

Rejecting Claims

Although not required, the city should notify the contractor, in writing, with a copy to the principal contractor and its surety, when a claim has been rejected for failure to comply with Chapter 573. This serves two purposes. First, any illusion the contractor may have that the city is somehow obligated to make sure they get paid by virtue of their communication is dispelled. Second, the principal contractor and its surety are advised the city is aware of a purported payment dispute with one of their subcontractors.

Early Release of Retainage

Contractors typically seek release of the project retainage upon substantial completion of a project. The city may release any portion of the retainage fund upon substantial completion, but is not obligated to do so unless the principal contractor makes a request for early release of the retainage. Chapter 26 of the Code provides that a contractor may request the release of all or part of the retained funds after substantial completion. The request shall be accompanied by a sworn statement of the contractor that, 10 calendar days prior to filing the request, notice was given to all known subcontractors, sub-subcontractors and suppliers. Upon receipt of a valid request, the city must release all or part of the retained funds. If labor and materials are yet to be provided when the request is submitted, the city should withhold 200 percent of the value of said labor or materials, as determined by the city’s authorized contract representative, until the work is completed.

There is some question whether a city may withhold any amount other than double the estimated cost of labor or materials yet to be provided as of the date the request for early release of retainage is received. Chapter 573 requires the public corporation to retain double the total amount of all claims on file after completion and final acceptance of the improvement. The Construction Bidding Procedures Act, Code Chapter 26, acknowledges payments for the construction of public improvements shall be made in accordance with the provisions of Chapter 573, except when a request for early release of retainage is submitted. Thus, the requirements of Chapter 26.13(2) (b) and (c), 573.14, and 573.15A (2) are not clearly reconcilable. Consult your local city attorney to determine the proper response to a request for early release of retainage when Chapter 573 claims are pending.

The city must hold the retainage for a period of 30 days after the completion and final acceptance of the improvement. If at the end of the 30-day period claims are on file, the city shall continue to retain from the unpaid funds a sum equal to double the total amount of all claims on file. The remaining balance of the unpaid fund, or if no claims are on file, the entire unpaid fund, shall be released and paid to the contractor at the end of the thirty day period.

Adjudicating Rights to Retained Funds

There is a limited window of opportunity to file a suit to adjudicate the rights to the retained funds. The city, the principal contractor, any claimant for labor or material who has filed a claim, or the surety on any given bond for the performance of the contract may file suit, at any time after the expiration of 30 days, and not later than 60 days, following the completion and final acceptance of the public improvement. These actions are filed by the subcontractors when they are unable to resolve their payment disputes with the principal contractor. Typically, the city does not have any interest in such proceedings. If the city has no interest in the adjudication of the rights to the retained funds, the city should file an answer and counterclaim seeking interpleader – permission to pay the retained funds to the clerk of court for safekeeping until such time as the court resolves the dispute. Upon payment of the retained funds into the clerk of court, the city should seek an order from the court dismissing it from any further liability and participation in the litigation.

Information provided by James Wainwright of Ahlers & Cooney, P.C.

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