New York Voids Construction Retainage Above 5%: A Contractor's Guide to the Prompt Payment Act

On a $2 million renovation, the difference between a 10% retainage clause and a 5% one is $100,000 of your money sitting in someone else's bank account — interest-free — until long after your crews have gone home. If you build in New York, a quiet amendment to the state's Prompt Payment Act just changed the math: any private construction contract clause that requires retainage above 5% of the contract sum is now void and unenforceable.

That sounds like a technical footnote. In practice it reshapes how you negotiate contracts, when your receivables convert to cash, and what your work-in-progress schedule should say. This guide walks through what changed, what the Prompt Payment Act already guaranteed you (many contractors never invoke it), and how to bring your books along.

What Changed: Retainage Above 5% Is Now Void​

Retainage — the slice of each progress payment an owner holds back as security until the job is done — has historically run 5% to 10% on commercial projects, with 10% not unusual on private work where the owner had all the leverage. Under the amendment to New York General Business Law Article 35-E (the statute most people call the Prompt Payment Act), a contract provision requiring retainage above 5% of the contract sum is void. You read that correctly: not "unfair," not "negotiable" — void, the way an illegal clause is void.

The underlying retention rules in the Act now line up as follows for qualifying private projects:

• Owners may retain no more than 5% of the contract sum, and only by mutual agreement reflected in the contract.
• Contractors and subcontractors may also retain no more than 5% from the tier below them — and in no case more than the owner actually retains. If the owner holds 3%, your subcontracts can't hold 5%.
• Retainage must be released within 30 days after final approval of the work. Miss that deadline and the holder owes interest at 1% per month on the amount that was due.

Two cautions before you red-pen every contract in the drawer. First, the Act applies to private construction contracts where total project cost equals or exceeds $150,000 — public work is governed by separate state finance rules, and small residential projects (individual one-to-three family dwellings and small residential tracts) are excluded. Second, "void" is a shield, not a sword: it protects you from an overreaching clause, but a legacy 10% clause sitting in an old template still invites disputes, delayed collections, and attorneys. Update the paper.

What the Prompt Payment Act Already Gave You (and You're Probably Not Using)​

The retainage cap rides on top of a payment-timing framework that has been in the statute for years — and that a remarkable number of small contractors treat as optional. It isn't. For covered private projects:

Twelve business days to approve or disapprove your pay application. The owner has to act on your invoice within 12 business days, and approval can't be unreasonably withheld. A disapproval has to be in writing and identify the disputed items. "We'll get to it" is not a compliant response.

Thirty days to pay after approval. Once an invoice is approved, payment is due from the owner no later than 30 days after approval — or, where a construction lender funds the draws, seven days after the owner actually has the cleared money in hand.

Seven days downstream. Once the contractor has good funds, subcontractors and suppliers must be paid within seven days — and any withholding requires a written notice stating the amount, the cause, and what has to be fixed, with payment within seven days after correction.

One percent per month interest. Late payments to a contractor or a subcontractor accrue interest at 1% per month (12% a year) on the unpaid balance, or a higher rate if the contract provides one.

The right to stop work. If undisputed amounts are unpaid, you can suspend performance after giving 10 calendar days' written notice — and a contractor who suspends properly is not in breach. Subcontractors get the same right, with notice to both the owner and the contractor. Contract language purporting to waive the suspension right is itself void, as are out-of-state choice-of-law and forum clauses (with a narrow exception for material suppliers) and clauses that block expedited arbitration: unresolved payment disputes can go to fast-track arbitration under AAA rules.

Add it up and the Act hands a disciplined contractor a complete collection rhythm: bill accurately, let the 12-business-day clock run, collect on day 30, and escalate with interest, a suspension notice, or arbitration when the check doesn't come. Most contractors use none of it. The retainage cap adds the missing piece — money that used to be hostage until "final sign-off" is now capped, defined, and released on a statutory deadline.

Why This Matters More Than It Sounds​

Retainage is where small contractors' cash goes to die. Because the holdback accumulates on every progress payment, by mid-project a contractor running 8% net margins can have the equivalent of an entire year's profit parked with the owner. The working capital has to come from somewhere: a line of credit (interest you pay), slow-paying your own subs (trust-fund risk, more below), or deferring equipment and hires.

Cutting maximum retainage from 10% to 5% releases half of that parked capital during the job's life. But the cap also removes a cushion owners historically used to manage completion risk — punch lists, callbacks, warranty exposure. Owners don't simply absorb that risk; they push back on milestone definitions, billing backup, and documentation. The winners under the new regime will be contractors whose pay applications are clean enough to approve on day one and whose closeout documentation makes final approval unambiguous.

The Contract Checklist: Fix the Paper Before the Next Job​

1. Pull every template you use — owner agreements, subcontracts, purchase orders — and cap retainage at 5% everywhere. A void clause still costs you money while two sides argue about what the contract means.
2. Sync your subcontracts' retainage to the head contract. Remember the proportionality rule: what you retain from subs can never exceed what the owner retains from you. Hard-code the linkage ("retainage equal to the lesser of 5% or the percentage actually retained by the owner") instead of a fixed number.
3. Delete payment terms that contradict the statute. Clauses establishing payment provisions that differ from the statutory scheme are void, too — so a subcontract that promises "net 60 after owner payment" isn't just sloppy, it's unenforceable, and it tells your subs you don't know the law.
4. Don't waive suspension or arbitration rights. Clauses barring them are void; leave them out and keep the leverage.
5. Negotiate step-downs and alternatives. Nothing stops a fair contract from reducing retainage at 50% completion or substantial completion, replacing cash retainage with a retainage bond, or funding the holdback into escrow. Bring these up at signing, not at punch list.
6. Define "final approval of the work" in the contract. The 30-day release clock starts at final approval; an ambiguous closeout process is the last remaining way money can sit. Specify the walkthrough, the punch list deadline, and the sign-off document.

The Bookkeeping Side: Get Retainage Off the Floor and Onto the Schedule​

Retainage isn't lost revenue — it's earned revenue you haven't collected, and your books should say so. Here is where proper record-keeping stops being a compliance chore and starts making you money.

Book it as a contract asset, split by release date. Under ASC 606, retainage is part of the transaction price; your right to it is conditioned on completing the work, not just the passage of time, so it lives as a contract asset (many contractors label it "retainage receivable"). The portion you expect to release within twelve months is a current asset; the rest is non-current. That classification matters more than it looks — it drives your current ratio, which drives your bonding line and your bank covenants.

Carry it on the WIP schedule, not in your head. A work-in-progress schedule that shows contract value, costs incurred, percent complete, billings to date, and retainage held — per project — is how you know whether a job is financing itself or quietly eating your line of credit. If you're using the percentage-of-completion method for long-term contracts (and most contractors with jobs spanning fiscal years should be), retainage flows through earned revenue in the period the work is performed, not when the check finally arrives.

Age retainage like any receivable. Track it by project with the release trigger date. When 30 days past final approval pass without payment, the ledger should already show the 1%-per-month interest accruing — interest you're entitled to claim and that flows to income when earned. A retainage aging report is also your early-warning system on owners who structurally pay slow.

Watch the gross-receipts thresholds for tax methods. Many small contractors fall under the gross-receipts exemption that permits the completed-contract method for contracts finishing within two years (the threshold is on the order of $30 million, indexed annually); above it, percentage-of-completion is generally required. Whichever method applies, your retainage records determine whether the tax return and the books agree — an audit-ready trail of billed, retained, and released amounts per contract is what turns a painful IRS or state notice into a nonevent.

Respect the trust-fund rules when the cash does land. Under New York's Lien Law, payments you receive on a construction project — including released retainage — are trust funds for your subcontractors, laborers, and material suppliers before they fund anything else. The statute requires you to keep books and records of trust receipts and disbursements; officers and agents who divert trust funds can be personally liable for them. In plain terms: when the owner releases $90,000 of retainage, your subs and suppliers on that project get paid from it before the truck payment does. Your accounting system should be able to trace every project dollar from receipt to trust-eligible disbursement without a spreadsheet archaeology dig.

A 30-Day Closeout Playbook​

The money is won or lost in the last month of the job:

1. Pre-punch your own work before requesting final approval, so the walkthrough finds nothing.
2. Submit the closeout package complete — as-builts, warranties, lien waivers, attestations — with the final pay application, because "incomplete documentation" is the last defensible reason to hold retainage.
3. Get final approval in writing and calendar day 30. That date starts the statutory release clock.
4. On day 31, send the demand citing the Act: the retainage amount, the 1%-per-month interest accruing, and (if you need leverage) notice of your intent to invoke the dispute process.
5. Release downstream within the same discipline. Once you're paid, your subs' retainage is due promptly — and it's their money held in trust.

Keep the Books That Get You Paid​

Every provision in this article — the 5% cap, the 30-day release, the 1% interest, the trust-fund records — presumes one thing: that you can prove what was billed, what was approved, what was retained, and when. A plain-text ledger where every pay application, retainage release, and interest accrual is a dated, auditable entry is exactly that proof. Beancount.io gives contractors plain-text accounting that is transparent, version-controlled, and AI-ready — no black boxes, no vendor lock-in. Get started for free and give your retainage the paper trail it deserves.