Understanding Prompt Payment Method 3

Are you familiar with the prompt payment and retainage provisions that your local agency has designated for federal-aid contracts? More importantly, do you know how to properly administer those provisions?

To ensure prompt payment to subcontractors, federal regulations1 require that a local agency specify one of three retainage methods on federally-assisted contracts:

  1. Local agencies do not withhold payments from the prime contractor, and the prime contractor does not withhold payments from subcontractors.2

  2. Local agencies do not withhold payments from the prime contractor, but the prime contractor does withhold payments from the subcontractor.3

  3. Local Agencies withhold payments from the prime contractor, and the prime contractor withholds payments from the subcontractor.

Method 3 is the option specified by most local agencies4 … and, unfortunately, also the one most incorrectly implemented.

In this method, a local agency must make partial retainage payments to the prime contractor as work is completed, and the prime contractor must pay all retainage to the subcontractor for completed work5 within 30 days of the prime contractor’s receipt of payment from the local agency.

US DOT specifically addresses the expectations of retainage payments to subcontractors with a posting and example on their DBE Q&A page:

At what time does the rule require prime contractors to return retainage to subcontractors? (Posted – 9/20/1999)

  • Many recipients hold back a certain percentage of the payment they owe the prime contractor (“retainage”) until all the work of the prime contractor has been satisfactorily completed. In turn, prime contractors (and middle-tier subcontractors) often withhold a certain percentage of the payment they owe to subcontractors. In many cases, prime contractors’ traditional practice has been to hold these funds until the recipient has made final payment to the prime contractor, even though the subcontractor’s work may have been satisfactorily completed months or years earlier. The prompt payment provision of the DBE rule is intended to change this practice.
  • The DBE rule requires recipients to mandate and enforce prompt payment of subcontractors, including the payment of retainage from the prime contractor to the subcontractor, as soon as subcontractor’s work has been satisfactorily completed (i.e., all the tasks called for in the subcontract have been accomplished and documented as required by the recipient). The prompt payment provision is intended to apply to subcontractors at all tiers.
  • For example, suppose there is a prime contract that will take three years to complete. Subcontractor X satisfactorily completes its work at the end of year one. The prime contractor must pay the retainage it has held to Subcontractor X at the end of year one. The prime contractor cannot wait until the end of year three, when the prime contract has been completed and the recipient has paid its retainage to the prime contractor, to make this payment to Subcontractor X.
  • Recipient’s DBE programs must include contractual provisions that unambiguously require contractors to make retainage payments to their subcontractors as soon as the subcontractor’s work has been satisfactorily completed. This is a race-neutral feature that applies to all subcontractors, not just DBEs. The Department will not approve a DBE program that lacks this feature.
  • The Department is fully aware that this requirement will cause recipients and many contractors to make changes in the traditional way they have done business. We believe that this change is necessary to remove a significant barrier to DBE participation in DOT- assisted contracts.
  • For additional information about Prompt Payment Method 3, I recommend checking out this Federal-aid Essentials video:


    1. 49 CFR 26.29 
    2. This is the method used on state-administered contracts. 
    3. In this method, the prime contractor must pay all retainage to the subcontractor for completion of accepted work within 30 days of the prime contractor’s receipt of payment from you, the LPA. 
    4. Local agencies designate their prompt payment method with their annual submittal of LAPM Exhibit 9-B, Local Agency DBE Submittal Form 
    5. A subcontractor’s work is satisfactorily completed when all the tasks called for in the subcontract have been accomplished and documented as required by the recipient. When a recipient has made an incremental acceptance of a portion of a prime contract, the work of a subcontractor covered by that acceptance is deemed to be satisfactorily completed. (49 CFR 26.29(c))