Key Questions Answered on Recent Amendments to New York’s Prompt Pay Act, by Andrew L. Richards, Esq., 2-11-2026

Towards the end of 2025, New York State Governor Kathy Hochul approved legislation that added a new Subdivision (5) to Section 757 of New York State General Business Law Article 35-E known as the Prompt Pay Act. 
 
The new subdivision renders void any provision in an applicable construction contract for a private improvement project executed after the effective date of said Section 757(5) (i.e., December 19, 2025) (the “Effective Date”) that requires a retained percentage greater than 5%. 
 
This change has generated two recurring questions regarding its application.
 
Question 1
 
Must a prime contractor reduce retainage in a subcontract executed after the Effective Date to 5% even if a higher percentage is set forth in an existing prime contract executed before the Effective Date?
 
Answer:   Yes. 
 
Discussion: As made clear by the legislative intent and statutory definitions, a “construction contract” entered into after the Effective Date is limited to 5% retainage, otherwise the provision is void without regard to the retainage held under the prime contract. The definition of a “construction contract” does not differentiate between prime contracts and subcontracts. They are both considered “construction contracts”.  Section 757 serves as the enforcement mechanism of the Prompt Pay Act, rendering certain contractual provisions void. Subdivision (5) thereof specifically renders void “[a] provision, covenant, clause or understanding in, collateral to or affecting a construction contract requiring retainage as expressly provided for by section 756-c in an amount exceeding five percent of the contract sum.”
 
The statute defines “construction contract”  as “a written or oral agreement for the construction, reconstruction, alteration, maintenance, moving or demolition of any building, structure or improvement, or relating to the excavation of or other development or improvement to land, and where the aggregate cost of the construction project including all labor, services, materials and equipment to be furnished, equals or exceeds one hundred fifty thousand dollars,” with public works and certain residential contracts excluded. The definition and the Bill Jacket make it clear that both prime contracts and subcontracts are “construction contracts.”
 
Section 757-c provides that construction contract retainage is limited to 5% and contractors cannot hold retainage in excess of that which is being held from them by an owner. The Bill Jacket to Section 757(5) states that the 2023 amendments to Section 757-c “brought private construction contracts in line with state construction contracts by limiting the amount of retainage that contractors and subcontractors can hold from other subcontractors to a maximum of five percent. While it was the clear intent of the legislature to ensure that qualifying projects capped retainage at five percent, there are still many construction projects in which general contractors offer retainage at 10% or higher. By updating the general business law to render any clause requiring retainage in excess of five percent as void, we will ensure compliance with the spirit of the law.”  The verbiage in the Bill Jacket makes it clear the prime contracts and subcontracts were meant to be subject to the statute.
 
What the legislature did not address, however, is the gap in time between prime contracts that were executed existing prior to the Effective Date and subcontracts entered into after the Effective Date. In this scenario, a prime contract with retainage of, e.g., 10% entered into before the Effective Date remains valid, but a subcontract entered into after the Effective Date, with mirroring retainage – 10% in this example – will be void.  Not only may subcontractors insist on the reduction of the subcontract retainage to 5% for new subcontracts, but a subcontractor is entitled to have its retainage reduced to 5% as of the Effective Date on subcontracts executed after the Effective Date even if there is a 10% retainage clause in the subcontract. As such, a prime contractor bound by an existing construction contract with retainage in excess of 5% faces exposure on subcontracts executed after the Effective Date.  
 
Question 2
 
May a prime contractor retain money on progress payments more than 5% early on in the project as long as they reduce the retainage to 5% towards the end of the project?
 
Answer: No. 
 
Discussion: The Bill Jacket clearly renders void any provision that requires retainage in an amount of more than 5%. Section 756-c makes it clear that the limit of any retainage is 5%. The statute does not differentiate between progress payment retainage early on during the project and that which is held sometime later during the project. There is no language in the statute that allows a prime contractor to retain more than 5% retainage at any time. Allowing retainage above 5% early on would introduce uncertainty as to when the retainage must be reduced to comply with the statute—whether at a specific percentage of completion, at substantial completion, or at some other milestone. To allow retainage to be held in excess of 5% at any time would open the statute to interpretation and there is no language in the statute that would support a higher percentage to be held at any time.

Author: Andrew L. Richards, Co-Chair of the Construction Practice Group and Co-Managing Partner of KD’s Long Island office