DBE Program Regulations: Prompt Payment and Retainage

DOT has released Official FAQs on DBE Program Regulations. These questions and answers provide guidance and information for compliance with the provisions under 49 CFR part 26. Like all guidance material, these questions and answers are not, in themselves, legally binding or mandatory, and do not constitute regulations.

At what time does the rule require prime contractors to return retainage to subcontractors?

• Many recipients hold back a certain percentage of the payment they owe the prime contractor (“retainage”) until all the work of the prime contractor has been satisfactorily completed. In turn, prime contractors (and middle-tier subcontractors) often withhold a certain percentage of the payment they owe to subcontractors. In many cases, prime contractors’ traditional practice has been to hold these funds until the recipient has made final payment to the prime contractor, even though the subcontractor’s work may have been satisfactorily completed months or years earlier. The prompt payment provision of the DBE rule is intended to change this practice.
• The DBE rule requires recipients to mandate and enforce prompt payment of subcontractors, including the payment of retainage from the prime contractor to the subcontractor, as soon as subcontractor’s work has been satisfactorily completed (i.e., all the tasks called for in the subcontract have been accomplished and documented as required by the recipient). The prompt payment provision is intended to apply to subcontractors at all tiers.
• For example, suppose ther is a prime contract that will take three years to complete. Subcontractor X satisfactorily completes its work at the end of year one. The prime contractor must pay the retainage it has held to Subcontractor X at the end of year one. The prime contractor cannot wait until the end of year three, when the prime contract has been completed and the recipient has paid its retainage to the prime contractor, to make this payment to Subcontractor X.
• Recipient’s DBE programs must include contractual provisions that unambiguously require contractors to make retainage payments to their subcontractors as soon as the subcontractor’s work has been satisfactorily completed. This is a race-neutral feature that applies to all subcontractors, not just DBEs. The Department will not approve a DBE program that lacks this feature.
• The Department is fully aware that this requirement will cause recipients and many contractors to make changes in the traditional way they have done business. We believe that this change is necessary to remove a significant barrier to DBE participation in DOT- assisted contracts.

In implementing the required prompt payment clause, may recipients require prime contractors to provide evidence of payment of retainage to subcontractors?

• The rule’s prompt payment clause requirement specifically applies to retainage (i.e., a portion of the payment owed by the prime contractor to a subcontractor that is held pending completion of the subcontractor’s work).
• In ensuring compliance with the prompt payment provision, recipients may require prime contractors to provide information concerning payments to subcontractors, including retainage.
• The rule’s prompt payment clause requirement specifically applies to retainage (i.e., a portion of the payment owed by the prime contractor to a subcontractor that is held pending completion of the subcontractor’s work).
• In ensuring compliance with the prompt payment provision, recipients may require prime contractors to provide information concerning payments to subcontractors, including retainage.

Must a recipient enforce the prompt payment clause required by the rule?

• Under 26.29(a), recipients are required to include a prompt payment clause in DOT- assisted contracts. This clause must require prime contractors to pay subcontractors and return any retainage within a certain number of days of satisfactory completion of the subcontractors’ work. This provision is a race-neutral requirement applying to DBE and non-DBE subcontractors alike.
• As 26.37(a) provides, recipients must implement appropriate mechanisms to ensure compliance with Part 26 requirements – including prompt payment – by all program participants. To do so, recipients must use legal and contract remedies available under Federal, state, and local law.
• 29(a) (1) and (2) mention certain mechanisms a recipient may use to implement the prompt payment requirement (i.e., penalties, a requirement for the recipient’s written consent for delays). The rule authorizes, but does not require, recipients to use these particular methods.
• However, the fact that these two cited methods are not mandatory does not mean that enforcement of the prompt payment clause itself is optional. Under 26.29 and 26.37, recipients must use some effective means or other to ensure compliance with prompt payment requirements. If the recipient does not choose to use the two methods mentioned in 26.29(a) (1) and (2), then it must use other effective methods.

Is relying on complaints an appropriate means of enforcing the prompt payment and retainage requirements of the rule?

• Relying only on complaints or notifications from subcontractors about a prime contractor’s failure to comply with prompt payment and retainage requirements is not a sufficient mechanism to enforce the requirements of this section.
• Subcontractors are often reluctant to complain about prime contractors for fear that doing so will make it more difficult to get work in the future. This means that recipients may not receive complaints that would alert them to noncompliance by prime contractors.
• While this section does not mandate that a recipient employ a specific type of mechanism, recipients are expected to take affirmative steps to monitor and enforce prompt payment and retainage requirements of section 26.29.

Are there ways that recipients can facilitate prompt payment of retainage to DBEs and other subcontractors while limiting burdens on prime contractors?

• The Department’s rule requires prime contractors to release retainage to subcontractors when the subcontractor’s work on the contract has been satisfactorily completed. This requirement is intended to mitigate a problem that makes it difficult for DBEs and other subcontractors to remain competitive.
• Prime contractors have expressed the concern about what they view as burdens that this requirement creates for them.
• There are a number of ways that recipients could ease potential burdens on prime contractors while continuing to implement the protections that Part 26 provides for below.
• Not every recipient has a retainage requirement. Given present-day bonding requirements for prime contractors, retainage requirements may not be essential to give recipients leverage to ensure that prime contractors complete a contract. Recipients could consider dropping their retainage requirement altogether.
• Frequently, recipients calculate retainage by the lesser of a percentage of total contract price or a fixed dollar amount (e.g., 5 percent or $100,000). Recipients could reevaluate these factors with an eye to lowering the thresholds.
• Recipients could review experience with retainage under different types of contracts and contract values and eliminate retainage for types of contracts or contract values where experience reflects a lower risk of non-performance.
• Recipients could approve/accept work at intervals throughout the life of a contract, rather than waiting until the end of the entire project to do so.
• Recipients could pay retainage to prime contractors on a pro-rated basis throughout the life of the contract, as portions of the work were completed, rather than waiting until the end of the entire project to pay the entire retainage amount.