Indiana prompt payment act and retainage rules

Indiana's prompt payment and retainage rules are written for public works. State projects follow IC 4-13.6-7 and local projects follow IC 36-1-12-14, and the two use the same formula: the owner may hold up to 6% of the value of satisfactorily completed work until the job is 50% complete and nothing after that, or up to 3% until substantial completion. Retainage can sit in an escrow account, and it must be paid out within 61 days after substantial completion. Separately, IC 5-17-5-1 charges state agencies and political subdivisions a penalty of 1% per month when they pay a public works contract late.

Retainage on state public works

When a state public works project is estimated at $1,000,000 or more, IC 4-13.6-7-2 requires the contract to include retainage provisions at three levels: from the state to the contractor, from the contractor to its subs, and for paying subs and suppliers. The state can hold back enough from the contractor to cover unpaid subs and suppliers.

Section 3 gives the state two choices. It can hold up to 6% of the value of satisfactorily completed work until the job is 50% complete and then stop withholding, or hold up to 3% until substantial completion. Once the work is substantially complete, it holds 200% of the value of any minor items still open, as set by the architect or engineer, until they are done. Under section 8, final settlement is due no later than 61 days after substantial completion if the contractor has materially fulfilled the contract, minus those punch items and any sub or supplier claims on file.

Retainage on local public works

Cities, counties, school corporations and other political subdivisions follow IC 36-1-12-14 on public works contracts over $200,000, excluding highways, roads, streets, alleys, bridges and related structures. A board may also apply the provisions to smaller contracts. The percentages match the state rules: 6% to the halfway point, or 3% to substantial completion, plus 200% of open punch items.

The difference is where the money sits. At the contractor's discretion, retainage can be held by the board or placed in escrow with a bank, savings and loan, or the state, with the escrow agent picked by mutual agreement. A board holding retainage itself does not have to pay interest on it. In escrow, the agent invests the money, takes a reasonable fee from the income, and releases income in proportion to principal. Payment of all principal and income is due within 61 days after substantial completion.

Late payment penalty: 1% per month

IC 5-17-5-1 makes every state agency and political subdivision that fails to pay a written public works contract on time liable for a penalty of 1% per month on the amount due. If the contract does not set a payment date, payment is timely if the check or warrant goes out within 35 days of receiving the goods or services or a properly completed claim, whichever applies. When a local legislative body or board must approve the claim, the 35 days run from the first regularly scheduled meeting held at least 10 days after the claim arrives.

Subcontractors and private jobs

The public works statutes require the contract to cover retainage from subs and payment of subs, and they let the owner withhold money to cover sub and supplier claims. The sections covered here do not set a fixed number of days for a prime to pay a sub after it is paid, and they do not address pay-if-paid clauses, so the subcontract terms matter. Read the payment article before you sign.

Private work is outside these statutes. Payment timing and retainage on a private Indiana job come from the contract, and the main tool for unpaid work is an Indiana mechanics lien. Also check Indiana contractor licensing and our prompt payment act primer. Smart Business Automator tracks retainage held and billed on every job and subcontract; see construction accounts receivable automation.