The Construction Counselor

As those in the construction industry know, Iowa Code Chapter 573 governs public projects in Iowa in many aspects, including setting forth the rights and obligations of those involved in public projects in regard to retainage. From time to time, there are disputes in the interplay between the various provisions of this chapter and questions about the balancing of the rights among the various players in the project—the project owner, the general/principal contractor and the subcontractors.

One key protection for public owners is the right to continue to withhold retainage in double the amount of the value of incomplete work until such work is completed. See Iowa Code § 573.28(2)(c). Public owners also have the right and obligation to continue to withhold retainage in double the amount of any valid claim against the retainage filed by subcontractors, which is a key protection for subcontractors. See Iowa Code § 573.14(1). One key protection for general contractors is the right to bond off claims by subcontractors by submitting a bond to the public owner in double the amount of such claims in an effort to require release of the appropriate retained funds by the public owner. See Iowa Code § 573.16(2). The complicated interplay between these two rights, and other provisions of Chapter 573, is precisely what took place in Charles L. Smith, Trustee in the Bankruptcy of Metro Concrete, Inc. v. Des Moines Area Community College (represented by Fredrikson attorney Jodie McDougal) and Rochon Corporation of Iowa, Inc. n/k/a Graphite Construction Group, Inc. (No. 22-2098).

The Court of Appeals issued an opinion on this case on February 7, 2024, reversing the district court’s ruling in the matter. Then, on April 4, 2024, the Iowa Supreme Court granted an application for further review, meaning this case will be heard by the Iowa Supreme Court. Below is a brief summary of the positions of the parties. Once the Iowa Supreme Court issues its opinion, a more detailed update will be posted.

Summary of the Positions and Prior Decisions

This case arose from the general contractor requesting release of retainage after it had bonded off a subcontractor’s Chapter 573 claim, but before final completion of the project had occurred. In short, the public owner’s position has been that it has the right to continue to withhold double the amount of the value of incomplete work pursuant to Iowa Code § 573.28(2)(c) in this situation, asserting that such provision prevails over the rights of a general contractor to require release of retainage after bonding off a subcontractor claim under Iowa Code § 573.16(2). Conversely, the general contractor’s position has been that the public owner must release double the amount of the bonded off subcontractor claim in this type of situation pursuant to Iowa Code § 573.16(2), asserting that such provision compels release of retainage regardless of Iowa Code § 573.28(2)(c).

At the district court level, the general contractor filed a motion to compel against the public owner, requesting that the court order the public owner to release double the amount of the bonded off subcontractor claim. In response, the district court denied the general contractor’s motion to compel the release of retainage.

On appeal, the Court of Appeals reversed the district court’s ruling, holding that the public owner was required to release double the amount of the bonded off claim, regardless of the public owner’s rights under section 573.28(2)(c) to withhold for incomplete work. The decision contains a full summary of the Court of Appeals’ bases for its decision.

Potential Impact on the Industry

This case has potential impacts for public owners, general contractors and subcontractors, as the Iowa Supreme Court decides the important questions implicated by this case. In light of this, the Community Colleges of Iowa, Iowa Association of School Boards and Iowa League of Cities have filed an amici curiae brief in support of DMACC’s appeal, indicating public owners have a strong interest in the outcome of this case.

A further update will be given once the Iowa Supreme Court enters its decision. Such decision is not expected until late 2024 or thereafter.

If you have questions regarding public construction projects or construction law in general, please contact Jodie McDougal (jmcdougal@fredlaw.com, 515.242.8971) and Jack O’Brien (jobrien@fredlaw.com, 515-242-8931).