Contractors view retainage on a construction project as protection to ensure that they will be paid. In many cases, that is what happens. Subcontractors on public works projects need to be careful, however, because without mechanics' lien rights, if they cannot access the retainage, they are out of luck if a general contractor becomes insolvent.

A recent case demonstrates how this can become a problem. A general contractor on a project to improve a state park was thrown off the project because Indiana's Department of Natural Resources did not like the quality or the pace of the general contractor's work. The general contractor then went insolvent and was unable to pay subcontractors who had performed work on the project. Unable to file a mechanics' lien, a subcontractor sued the DNR, arguing that the general contractor "owned" the project's retainage and that the subcontractor had a right to get paid from these proceeds.

The DNR disagreed and argued that retainage existed in part to permit an owner to recoup losses caused by an incompetent contractor. Unfortunately for the subcontractor, the Indiana court of appeals agreed. The court permitted the DNR to withdraw cost overruns from the retainage that the DNR established had been incurred because of the change in general contractors.

The moral here is that contractors should always be careful in bidding and working on public projects because different rules apply to public works projects. Contractors typically have fewer rights against a public owner than a private one. That means that smart subcontractors work to insure that they are aware of project wide issues and dynamics before a big problem, like termination of a contract, occurs. Ignorance is not bliss under those circumstances.

Cite for lawyers: Department of Natural Resources v. CCI, 860 N.E.2d 651 (Ind. Ct. App. 2007).