Industry Watch: New York’s Retainage Law Exposes a Bigger Owner-Side Blind Spot

Prompt payment laws rarely come up, until they’re violated.

That was my first reaction reading New York’s latest retainage amendment. I’m not surprised by the law itself. I’ve been writing about prompt payment acts around the world for years. What struck me was how many standard construction contracts are likely out of compliance under this new regulation.

The New York Retainage Change Owners Can’t Ignore

As of December 19, 2025, private construction contracts in New York over $150,000 cannot require more than 5% total retainage.

Not “on average.”
Not “unless the contract says otherwise.”
At all.

Any provision requiring more than 5% retainage is now void as a matter of law.

This applies even if:

The contractor agreed to it
The clause has been in your boilerplate for years
“That’s how you’ve always done it”

The amendment closes a loophole that previously allowed retainage limits to be bypassed through creative drafting. That door is now shut.

If you are issuing contracts in New York and still requiring 10% retainage, you are likely out of compliance.

Reference: Troutman Pepper Locke, via Lexology,
“New York Further Tightens 2023 Retainage Law” (Jan. 2026)
https://www.lexology.com/library/detail.aspx?g=e12e5446-dde1-4458-a4bf-6075f3084015

Why Retainage Exists in the First Place

Here’s where the conversation usually goes sideways.

Retainage is often treated as a practice few really understand. A percentage is copied from the last project, checked off, and carried forward with little thought and often no negotiation.

But retainage was never meant to be arbitrary.

Historically, retainage exists to protect completion, not to punish cash flow.

As summarized in the Construction Retainage overview on Wikipedia:

“The point was to withhold the contractor’s profit only, not to make the contractor and its subcontractors finance the project.”
— Wikipedia, Retainage
https://en.wikipedia.org/wiki/Retainage

That sentence captures the original intent better than most contract language in use today.

The underlying logic is simple:

The amount withheld should be meaningful enough to motivate the contractor to finish the work.

That motivation has always been tied—implicitly and sometimes explicitly—to expected profit.

Retainage and Profit Were Never Accidental Twins

For decades, industry practice assumed:

Typical construction profit margins ranged between 5% and 10%
Retainage percentages often mirrored that range

This wasn’t coincidence.

The alignment was intentional:

If profit equals retainage
Then the contractor must complete the work to earn their margin

Once retainage drops below expected profit, its leverage weakens.

Industry organizations have consistently framed retainage this way—not as punishment, but as completion security.

The Associated General Contractors of America notes:

“Retainage was intended to ensure satisfactory completion of work, not to serve as a financing mechanism for owners.”
— AGC
https://www.agc.org/news/2019/01/24/retainage-reform-critical-improving-construction-cash-flow

The Construction Management Association of America similarly treats retainage as one of several financial controls used to manage completion risk:
https://cmaanet.org/resources/owner-contractor-relationships

While no statute ever required that “retainage must equal profit,” the functional rationale has always been economic alignment.

The Problem With an Arbitrary 5%

A flat 5% cap assumes something that simply isn’t true:

That all projects carry the same completion risk.

On many modern projects:

Contractor margins are already compressed
Risk is shifted aggressively downstream
Closeout effort is substantial and undercompensated

In those conditions, a 5% retainage may:

Be fully consumed by overhead
Be insufficient to drive timely closeout
Lose its intended behavioral effect entirely

The result is predictable.

Owners think they’re protected.
They’re often not.

What Owners and Owner’s Reps Should Be Doing Now

This law doesn’t eliminate risk.
It reallocates responsibility.

Owner-side professionals need to adjust accordingly.

Audit your contracts immediately
If you’re working in New York, confirm retainage language complies with the 5% cap.
Stop treating retainage as your primary protection
At 5%, it is no longer a meaningful completion lever on many projects.
Re-evaluate bonding requirements
With reduced retainage, performance bonds matter more, not less.

As the Surety & Fidelity Association of America explains:
https://www.surety.org/what-is-surety/

Understand the “why,” not just the rule
Compliance without comprehension is how owners get exposed.

A Final Word to Owner’s Representatives

Ignorance of prompt payment laws is no longer a defensible position.

If you are acting on behalf of an owner:

You are expected to know these constraints
You are expected to advise accordingly
You are expected to adjust risk strategies when the rules change

Retainage was never about withholding money.
It was about ensuring completion.

If the law limits your leverage, your strategy has to evolve.

Discussion

How are you adjusting risk protections with reduced retainage?
Are your contracts still relying on outdated assumptions?
Have bonds become more central in your delivery strategy?