New Jersey Senate Unanimously Passes 2% Cap on Retainage for Partial Payments on State Agency Projects
Overview
On June 30, 2025, the New Jersey Senate passed, in a vote of 39-0 with one abstention, a bill that prohibits State agencies acting as owners on public projects from withholding more than two percent (2%) of retainage from contractors for partial payments. See NJ S4028. The bill, first introduced in January 2025, sponsored by Deputy Majority Leader Paul A. Sarlo (D), amends the New Jersey Prompt Payment Act (NJPPA), codified at N.J.S.A. 2A:30A-2, to include two new subparagraphs that affect payment on public projects in New Jersey. The amendment takes effect “immediately.” Ibid.
Basics of the New Jersey Prompt Payment Act
N.J.S.A. 2A:30A-2 governs payments to contractors on public projects, the timing requirements for those payments, and alternative dispute resolution mechanisms when payments are disputed. It provides that where a contractor has completed work and the owner or its agent has certified the billing for that work, the owner must pay the contractor the amount due within the time prescribed by their contract, but certainly within thirty (30) days; unless a governing body must vote on the authorization of payment, in which case the payment may be made beyond the 30-day deadline. “The billing shall be deemed approved and certified 20 days after the owner receives it unless the owner provides… a written statement of the amount withheld and the reason for withholding payment, except that in the case of a public or governmental entity that requires the entity’s governing body to vote on authorizations for each periodic payment, final payment or retainage monies, the amount due may be approved and certified at the next scheduled public meeting of the entity’s governing body, and paid during the entity’s subsequent payment cycle, provided this exception has been defined in the bid specifications and contract documents.” N.J.S.A. 2A:30A-2(a).
Similarly, contractors must pay subcontractors within ten (10) calendar days for satisfactory work performed. N.J.S.A. 2A:30A-2(b). If payment is late, the liable party is responsible for paying the amount owed under the contract and interest at the prime rate plus one percent (1%). N.J.S.A. 2A:30A-2(c). Upon seven (7) calendar days’ written notice to a party failing to make timely payments, the contractor and/or subcontractor owed monies can suspend performance without penalty for breach of contract. N.J.S.A. 2A:30A-2(d). Any disputes concerning payments may be referred to alternative dispute resolution, and a prevailing party may be awarded legal costs and fees. N.J.S.A. 2A:30A-2(f).
July 30, 2025 Amendment to the NJPPA
Under the new amendment, subsection (g) was added to require that a “State agency,” as defined in N.J.S.A. 52:13D-13(2)(a), acting as an owner of real property to be improved cannot withhold more than two percent (2%) “of the amount due on each partial payment owed to the contractor … if the contractor has provided a performance bond within 15 days of the award or conditional award.” N.J.S.A. 2A:30A-2(g). The new subsection (h) provides, “Subsection g. of this section shall not apply when a contractor has been subject to termination of a contract for cause at any point in the five (5) years prior to the award or conditional award. In that circumstance, the State agency may, at its discretion, withhold partial payments exceeding two percent of the amount due on each partial payment owed to the contractor.” N.J.S.A. 2A:30A-2(h).
What the Amendment Means for Contractors and State Agency-Owners
- Limited Applicability to State Agency Contracts, Partial Payments, Where Performance Bond Provided
This amendment is not as exciting for contractors as it may seem. The new two percent (2%) cap is fairly limited in scope because this amendment only applies to State agencies, and only to partial payments owed. Moreover, the two percent (2%) cap only applies if the contractor has timely provided a performance bond - Oddly Familiar; 2% Not So “New”
Even though the amendment applies to limited circumstances, a two percent (2%) cap on retainage is familiar to New Jersey contractors. Municipal and county public works projects already have a two percent (2%) cap on retainage. See, e.g., N.J.S.A. 40A:11-16.3. Similarly, most State agency projects were already limited to a two percent (2%) to five percent (5%) cap on retainage. See, e.g., N.J.S.A. 18A:18A-40.3, N.J.S.A. 27:7-34. Therefore, this new cap on retainage doesn’t feel that new. - State Agencies Have Broad Discretionary Authority to Withhold More than 2%
What is truly newsworthy is the greater flexibility State agencies now have to exceed the cap on retainage they withhold. The new subsection (h) provides a significant exception to the two percent (2%) cap. Using broad language, subsection (h) grants State agencies discretionary authority to withhold more than two percent (2%) retainage on partial payments to contractors that have been “subject” to termination for cause in the prior five (5) years. N.J.S.A. 2A:30A-2(h). This language encompasses not just those contractors that were indeed terminated over the previous five (5) years, but also those that were not terminated but could potentially have been terminated. There is little, if any, explanation from the Legislature as to the intentions behind including the words “subject to” in the new subsection (h).
It is unclear whether the Legislature defines it as “subject to termination for cause.” Some questions that arise with respect to this language are: Does it encompass contractors that were subject to termination on only state projects, or any public project? Does it include those on projects beyond New Jersey’s jurisdiction? If a contractor was terminated for cause on a Tennessee DOT program in 2021, is it now a victim of a higher retainage withholding under subsection (h)? Is a contractor considered “subject to” termination for cause when it simply signs a contract agreeing to a termination for cause provision, or at some time later when it defaults on performance and has to cure? - State Agencies Deciding to Withhold More Than 2% Have No Ceiling on How Much They Withhold
Even more troubling than the potential widespread application of subsection (h) to virtually any contractor is that there is no cap on the amount the State agency can withhold using its discretionary authority under subsection (h). Previously, similar laws required caps of four percent (4%) or five percent (5%). See, e.g., N.J.S.A. 18A:18A-40.3, N.J.S.A. 27:7-34. Subsection (h) provides no such ceiling for State agencies. Also of note is that subsection (h) applies to contractors subject to termination in the last five (5) years, whether or not they are performing satisfactorily on the specific project for which retainage is being withheld. Compare N.J.S.A. 2A:30A-2(h) with N.J.S.A. 27:7-34 (“[a]t any time during the performance of the work, if work is not progressing, … the commissioner may, at the commissioner’s discretion, increase the withholding to 4% of the payment due.”)
Conclusion
As the two percent (2%) cap is so limited, and the exception to it so broad, this isn’t as big of a win for contractors as it seems at first glance. It remains to be seen how courts will interpret this new language, but it appears the balance of power to withhold greater amounts of retainage still rests with State agencies, through the sneaky addition of the syntax, “subject to,” and the omission of a cap on State agencies’ discretionary authority to exceed the two percent (2%) cap. Contractors should be prepared to face potentially greater withholdings of their retainage for State projects, even if they are performing satisfactorily on that project.
About the Author
Alexandra Colby is an Attorney in the New Jersey office of Cokinos | Young, and she approaches each client matter with a strong work ethic and commitment to the client’s holistic success. If you have any questions about the 2% Cap update or any related challenges, Ali can be reached at (609) 412-8211 or acolby@cokinoslaw.com.
About Cokinos | Young
Cokinos | Young has led Texas construction and real estate law for over three decades. And today, our 100+ dedicated professionals operate coast to coast and proudly handle all aspects of construction law for owner/developers, project managers, general contractors, design professionals, subcontractors, sureties, and lenders. We provide both dispute resolution and transactional services to clients through all phases of commercial, industrial, pipeline, offshore, civil, and residential construction. Our reputation was built on relentless commitment to client service and the industries we serve, and that remains our primary driver. Dedicated. Resilient. Expertise. That’s Cokinos | Young. Learn more at cokinoslaw.com.