Void and Unenforceable: New York’s Final Word on the 5% Retainage Limit for Private Projects

The landscape of the New York construction industry has shifted significantly with the enactment of Senate Bill S5655. Signed by Governor Kathy Hochul on December 19, 2025, this legislation further amended the state’s Prompt Payment Act to ensure that the 5% cap on retainage in private construction contracts is strictly enforced.

Before this amendment, owners and general contractors often used Section 756-a of the New York General Business Law to circumvent retainage caps. This section previously allowed contractual terms to supersede the Prompt Payment Act. Under the new legislation, the 5% cap is no longer a default that can be negotiated away. Any provision in a private construction contract exceeding $150,000 that requires retainage of more than 5% of the contract sum is now void and replaced by the requirements of the new statute.

Calculation and Practical Application

It is critical for firms to understand how this cap is calculated. Based on the plain language of the statute, the 5% cap applies to the total contract sum, rather than individual progress payments.

In practice, the following payment structure complies with the amended Prompt Pay Act:

• Owner withholds 10% retainage on progress payments for the first 50% of the project.
• Once the project is 50% complete, retainage withholding is reduced to 0% for all future progress payments.

Under this structure, the total retainage held does not exceed the statutory 5% limit of the total contract value.

Who Must Comply?

The mandate applies broadly to private construction contracts exceeding $150,000. These requirements took effect immediately and apply to all contracts entered on or after December 19, 2025.

Because any contractual provision that fails to comply with Section 756-c is now legally unenforceable, owners, contractors and subcontractors should carefully review their agreements. Non-compliance may leave you with unenforceable contract terms, complicating your ability to manage project cash flow and security.

Our team at Cohen Seglias can audit your current practices and review your current agreements to ensure compliance with New York’s latest statutory mandate. By proactively addressing these legislative changes, we can help insulate your business from the legal risks of noncompliance and ensure your retainage provisions remain enforceable.