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New Purchasing Requirements on Public Works Projects

With the new legislative session, several changes in the area of public works stand to impact how cities in Texas implement payments for public works projects in the state.  A few of the provisions which will impact public works projects going forward are described below.

Under a public works contract, often the municipality will keep a portion of the contract, the “retainage”, until the project is signed off and complete.  With respect to the “retainage”  HB 692 implements several changes to Texas Government Code 2252 affecting both municipalities and the contractors and subcontractors who work on such projects.

The first such change is the imposition of a definition of a “warranty period” which before was undefined: the period of time in a contract during which certain terms in the statute regarding the warranting of work are in effect.  This definition triggers certain provisions which will be discussed below.

The next significant change is a contract provision requirement.  Each contract shall now have a provision which establishes when a contract is considered substantially complete and that the municipality may release all or part of the retainage for fully completed OR substantially completed portions of the project.

The amount of the retainage varies, depending on the amount of the contract.  If the total value of the project is under 5 million dollars, the retainage may not exceed 10%, both of the total project and of any particular portion of the project, including materials and equipment.  If the amount of the contract is over 5 million dollars, then the amount of the retainage may not exceed 5% of both the total or any individual item, including materials or equipment.  If the amount of the project is over 10 million dollars, then the governmental entity and the contractor may agree to deposit any retainage into an interest-bearing account.  Once the contract is complete, the retainage and the interest must be delivered to the contractor.

This retainage limit also applies to the general contractor, and any subcontractors who also hire subcontractors.  The contractors/subcontractors may not retain a higher percentage than the percentage under the contract between the general contractor and governmental entity.

Once the work is complete, the governmental entity may not withhold retainage.  The governmental entity may not impose additional requirements on the contractor in order to release the retainage.  If there is a bona fide dispute between the parties, the governmental entity may withhold the retainage.  The municipality must provide written notice about the basis of the withholding.  If the municipality points out the deficiency or deficiencies and the general contractor does not disagree with the assessment, the contractor may offer to either cure the non-compliant labor, services, or materials.  In the alternative, the contractor may make an offer of money as compensation for the deficiency if the noncompliant labor, services, or materials cannot promptly be cured.  If the contractor makes this offer, the municipality is NOT required to accept the offer of compensation by payment of money.  The statute also expressly preserves the right of the municipality to pursue its legal remedies under the contract or a statute.

Municipalities who are contemplating new public works projects should be aware of the new retainage requirements and include the required language in all contracts going forward.

Please do not rely on this article as legal advice. We can tell you what the law is, but until we know the facts of your given situation, we cannot provide legal guidance. This website is for informational purposes and not for the purposes of providing legal advice. Information about our commercial and business litigation practice can be found here.

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