Third-Party Claims Against Retainage Funds

Retainage funds do not only serve as a protective mechanism for an owner on a construction project. Third parties may also benefit from the funds that have been earned by the contractor, but withheld pending completion of the construction project. Third parties may seek to satisfy a contractor’s outstanding indebtedness out of the retainage funds. A prime candidate as a third-party claimant is the Internal Revenue Service. When a contractor is delinquent in the payment of its taxes, the IRS may claim payment out of the contractor’s retainage by way of levy. If a levy is placed on the funds, notice of the amount withheld would be sent to the delinquent contractor as well as the IRS. With respect to a contractor’s progress payments, this would provide a fairly steady source of income with which the delinquent taxes could be satisfied.

Other third parties, owed money by the contractor, could also seek to reach the retainage funds by way of a judicial attachment. Once a court orders that the funds are to be attached, they would be turned over to the court’s custody and thereafter used to satisfy the judgment entered in favor of the third party. Should monies be paid over to the third party claimant, the surety’s security for completion of the project would be diminished; thus, notice to the surety would be provided.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.