Companion Guide to Video August 2012

www.fhwa.dot.gov/federal-aidessentials

Each year the Federal Highway Administration, 

or FHWA, allocates about $40 billion in Federal 

funds to State departments of transportation, or 

State DOTs, and local public agencies, or LPAs, 

to construct and maintain the country’s highway 

system. These Federal funds provide contract 

opportunities for prime contractors and their 

subcontractors to participate in the construction 

and maintenance of our Nation’s roadways. 

Frustration can set in when subcontractors do 

not receive timely payment from prime 

contractors for services rendered. 

As the LPA, one of the requirements for your 

federally assisted project is to ensure that your 

prime contractors adhere to the Disadvantaged 

Business Enterprise (DBE) Program 

requirement to promptly pay all subcontractors 

for completed work.

Let’s consider a hypothetical case. Suppose 

prime contractor, Zenith Construction Inc., 

contracts with ABC Construction to build 

retaining walls on a federally funded LPA 

highway contract. ABC, as the subcontractor to 

Zenith, notifies you, the LPA, that it has not yet 

received payment from the prime contractor, 

even though the work is finished. Your records 

show that ABC Construction constructed the 

retaining walls and that you accepted the 

retaining walls as complete and paid Zenith 

Construction for the work. You contact the prime 

contractor to find out why ABC has not been 

paid. Zenith advises you that it decided to 

withhold payment for the retaining walls on the 

LPA highway contract until ABC fixes a problem 

on an earlier State DOT contract currently in 

dispute. 

Can Zenith withhold payment from ABC on this 

contract? The answer is “no.” Zenith must abide 

by what is known as the prompt payment 

provisions in the LPA highway contract 

regardless of any problems Zenith may have 

had with ABC on previous contracts. 

As the LPA, your enforcement of 

the prompt payment and return of 

retainage provisions of the DBE 

program will help remedy this 

situation.

Over the next few minutes, we will explain 

prompt payment and return of retainage 

provisions and how you, as an LPA, can comply

with the applicable Federal regulations. 

Why are prompt payment provisions needed? In 

the past, contracts did not include the prompt 

payment and return of retainage provisions. 

When small businesses were not promptly paid, 

little or no recourse was available for them to 

seek payment for their services from 

unresponsive prime contractors. Some State 

statutes do allow subcontractors to file a lien 

Civil Rights

Disadvantaged Business Enterprise

Prompt Payment and Return of Retainage

Prime contractors must adhere to the Disadvantaged Business 

Enterprise (DBE) Program and promptly pay subcontractors for 

completed work
Federal-aid Essentials for Local Public Agencies

against the prime contractor. But small 

businesses still faced a dilemma of whether to 

take formal action against their unresponsive 

prime contractors and risk jeopardizing future 

opportunities to subcontract with that prime 

contractor.

Prompt payment can become a problem for 

small businesses, such as subcontractors, 

because they tend to have less capital and 

tighter cash flow than larger businesses, such as 

prime contractors. Late payment from a prime 

contractor can create barriers for subcontractors 

to compete in the marketplace. When the prime 

contractor is slow in paying, the subcontractor’s 

revenue flow is disrupted.

The untimely receipt of payment can limit the 

ability of a small business to pay its employees 

and keep current with its bills. Small businesses 

lack the resources of larger companies to 

supplement needed cash from savings or lines 

of credit.

In 1999, prompt payment and return of retainage 

provisions were specifically added as contract 

requirements under the DBE Program for 

federally assisted projects. These provisions are 

intended to remove the late payment barriers not 

only for DBEs, but for all subcontractors.

A key element to ensure subcontractors are 

promptly paid is to have your prime contract for 

federally funded projects include a prompt 

payment clause. The DBE Program prompt 

payment provision requires prime contractors to 

pay all subcontractors, including DBEs, within 30 

days of the prime contractor’s receipt of 

payment from you, the LPA.

The regulations also require prompt return of 

retainage, which is when a portion of the 

payment owed to either the prime or the 

subcontractor is held pending the satisfactory 

completion of work. Satisfactory completion 

means that all tasks specified in the contract or 

subcontract have been accomplished and that 

the LPA has accepted the work. 

Federal regulations require each State DBE 

program to specify which of three retainage 

options the State DOT uses. The State DBE 

program will specify which of the three options is 

applicable.

The first option is when the State DOT or LPA 

does not withhold from the prime contractor and 

the prime contractor does not withhold from 

subcontractors.

The second option is when the State DOT or 

LPA does not withhold from the prime 

contractor, but the prime contractor does 

withhold from the subcontractor. In this option, 

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.

In the third option, the State DOT or LPA 

withholds from the prime contractor and the 

prime contractor withholds from the 

subcontractor.

In this option, the LPA 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 

completion of the accepted work within 30 days 

of the prime contractor’s receipt of payment from 

you, the LPA.

Consult your State DBE program plan to 

determine which retainage provision applies in 

your State.

So, how can you ensure, as the 

LPA, that subcontractors and 

DBEs are not being adversely 

affected due to the prime 

contractor’s late payments? 
Federal-aid Essentials for Local Public Agencies

First, the prompt payment and retainage clauses 

must be included in all prime contracts and 

subcontracts. 

Second, do not wait for complaints from 

subcontractors and DBEs about not receiving 

their payments. Proactively monitor your prime 

contractors to ensure they are paying their 

subcontractors within the contractual 30-day 

timeframe through a non-complaint-driven 

tracking mechanism. Refer to your State’s DBE 

program plan for suggestions on how to monitor 

your contracts for compliance.

Third, if you find your prime contractors are not 

in compliance with their contractual obligations 

regarding prompt payments and return of 

retainage, initiate enforcement actions. Your 

State’s DBE program plan outlines enforcement 

actions, such as withholding payment to the 

prime contractor. If the DBE program plan does 

not contain enforcement sanctions, add 

enforcement language to your contract with the 

prime contractor.

As the LPA, proactively ensure that the prime 

contractors follow the prompt payment and 

retainage requirements. Do this by including the 

prompt payment and retainage clauses in your 

contracts, actively monitoring the construction 

payments, and enforcing the contract 

specifications before they begin to adversely 

affect the subcontractor.
Federal-aid Essentials for Local Public Agencies

The content of this 

document is not a 

substitute for 

information obtained 

from State departments 

of transportation, 

appropriate FHWA 

Division Offices, and 

applicable laws. 

Scenarios have been 

simplified for emphasis 

and do not necessarily 

reflect the actual range of 

requirements applicable 

to the scenario or this 

topic. This document

was created under 

contract number

DTFH63-12-F-00025 by 

the Federal Highway 

Administration, U.S. 

Department of 

Transportation, and is 

offered to the public to 

heighten and focus 

awareness of Federal-aid 

requirements within the 

local public agencies 

community and 

reinforces the 

importance of these 

necessary policies, 

procedures, and 

practices.

This companion resource 

is the script content for 

the video production of 

the same name. 

Additional Resources

• Information on prompt payment mechanisms

http://www.osdbu.dot.gov/DBEProgram/final/final16.cfm

• Information on retainage

http://www.osdbu.dot.gov/dbeprogram/dbeqna.cfm#26.29

• Information on union versus non-union status of a DBE firm

http://www.osdbu.dot.gov/DBEProgram/dbeqna.cfm#26.53fIV 

• Regulation on DBE requirements on prompt payment and retainage

http://www.ecfr.gov/cgi-bin/textidx?region=DIV1;rgn1=Section%20Heading;op2=and;rgn2=Section;o

p3=and;rgn3=Section;view=text;idno=49;node=49%3A1.0.1.1.20;rgn

=div5#49:1.0.1.1.20.6

• Regulation on DBE requirements on compliance and enforcement

http://www.ecfr.gov/cgi-bin/textidx?region=DIV1;rgn1=Section%20Heading;op2=and;rgn2=Section;o

p3=and;rgn3=Section;view=text;idno=49;node=49%3A1.0.1.1.20;rgn

=div5#49:1.0.1.1.20.6

• Regulation on DBE requirements on monitoring contract performance

http://www.ecfr.gov/cgi-bin/textidx?region=DIV1;rgn1=Section%20Heading;op2=and;rgn2=Section;o

p3=and;rgn3=Section;view=text;idno=49;node=49%3A1.0.1.1.20;rgn

=div5#49:1.0.1.1.20.2.18.9