Retainage Disputes: When Must It Be Released in Texas?

Two things called retainage

Most retainage fights start with a confusion of terms. Contractual retainage is the percentage each pay application that the paying party holds back under the contract until a stated event, usually substantial completion, final completion or acceptance. The contract sets the rate and the release trigger, and on a private project no Texas statute overrides either. Reserved funds, which the Property Code also calls retained funds, are a statutory requirement on the owner: 10 percent of the contract price, or 10 percent of the value of work done, held during the work and for 30 days after completion, as security for subcontractors and suppliers who perfect liens (§ 53.101). The two overlap in practice because owners use the contract's retainage to satisfy the statutory duty, but they answer different questions.

The Prompt Payment Act, Property Code chapter 28, requires the owner to pay a proper pay request within 35 days and the contractor to pass payment down within seven days, but it does not cap retainage or say when retainage becomes due. It applies to retainage only once the contract makes it payable; from that day the 35-day and seven-day clocks run, and late retainage earns the statutory interest. The Texas Prompt Payment Act covers those mechanics.

When does the contract make retainage due on a private project?

Read three clauses: the payment article, the definition of substantial and final completion, and the final payment conditions. Typical conditions include an architect's final certificate, a punch list signed off, as-built drawings, warranties, consent of surety and, above all, final lien waivers from the contractor and every subcontractor and supplier. Each unmet condition is a defense the owner will raise, so the first step in a retainage dispute is a checklist of what the contract requires for release and what has actually been delivered.

Owners may withhold from retainage only what the contract and the Prompt Payment Act allow. Under § 28.003 an amount may be withheld for a good faith dispute, up to 100 percent of the disputed difference on commercial property and 110 percent on a single-family residence, duplex, triplex or fourplex. Holding the entire retainage over a disputed item worth a fraction of it is over-withholding, and interest runs on the excess.

Example

Suppose a Dallas interior finish-out contract holds 10 percent retainage payable at final completion, and the owner's representative lists eleven punch items with a reasonable repair value well below the retainage held. The contractor completes nine and disputes two. The owner may hold an amount tied to the two disputed items, in good faith and within the statutory cap, and must release the rest once the other final payment conditions are met. If the owner instead holds the whole retainage for months, interest at the Prompt Payment Act rate accrues on the overheld portion, and the contractor keeps its lien rights so long as it meets the chapter 53 deadlines measured from completion.

The owner's reserved funds: what the statute requires

Under § 53.101 the owner must reserve 10 percent of the contract price, or 10 percent of the value of the work done, during the progress of the work and for 30 days after it is completed. The reserved funds secure payment of the mechanics and suppliers at every tier who perfect their liens (§ 53.102). A claimant has a lien on the reserved funds if it sent the notices chapter 53 requires and filed its lien affidavit by the 30th day after the work was completed, the original contract was terminated or the original contractor abandoned it (§ 53.103), or in the retainage-notice route described below.

An owner that fails to reserve the funds, or pays them out before the 30 days run, does not escape the claims. Claimants who complied with the statute then have a lien against the improvements and the land at least to the extent of the amount that should have been reserved (§ 53.105). That is why an owner's lawyer will not release final payment to the general contractor until the 30 days have passed and no lien affidavits have been filed, whatever the contract says about final payment timing.

The owner can fix the completion date by filing an affidavit of completion with the county clerk and sending it to the original contractor and to every claimant that has sent a notice (§ 53.106). A properly filed and served affidavit is prima facie evidence of the completion date; one filed more than ten days after completion moves the completion date to the filing date. Without it, the parties argue later about when the 30 days started.

How does a subcontractor lien for unpaid retainage?

With a separate notice and a separate deadline. A subcontractor or supplier whose contract provides for retainage must send a notice of claim for unpaid retainage to the owner and the original contractor by the earlier of the 30th day after its own contract is completed, terminated or abandoned, or the 30th day after the original contract is terminated or abandoned, unless the retainage was already included in a monthly notice of claim (§ 53.057). The notice must be in substantially the statutory form. A claimant who sends it on time and then either complies with the reserved-funds subchapter or files its lien affidavit by the usual chapter 53 date has a lien on the reserved funds and a personal claim against the owner for them.

The trap is timing. A subcontractor's own contract often ends months before the project does. The retainage notice is due 30 days after the subcontractor finishes, not 30 days after the project finishes, and most unpaid retainage claims that fail do so here. Texas mechanic's lien deadlines puts this date beside the others.

What are the rules on public projects?

Government Code § 2252.032 sets limits that private contracts do not have. A governmental entity may not withhold retainage of more than 10 percent of the contract price, and no more than 5 percent on a contract of $5 million or more (with a narrow exception for dam-related work). A prime contractor may not withhold a higher percentage from a subcontractor than the entity may withhold from the prime, and the same limit flows down to lower tiers. The contract must define substantial completion and say when retainage may be released for substantially or fully completed portions.

Once the prime contractor has completed its work, the entity may not continue holding retainage, including through the warranty period, and may not hold it to force rework of properly installed, designer-specified manufactured goods. At final payment the entity may withhold only for a bona fide dispute over work that does not comply with the contract, or if the surety does not consent to release, and it must tell the contractor in writing why. The contractor may then cure or offer reasonable compensation. Payment of public retainage is also subject to the public prompt payment rules in Government Code chapter 2251, not Property Code chapter 28.

A subcontractor's retainage on a public job is a bond claim rather than a lien. Under Government Code § 2253.046 the claimant mails notice of the retainage claim to the prime contractor and the surety by the 90th day after final completion of the public work contract, and the claim is never valid above the contract's retainage or 10 percent of that contract. Payment bond claims on Texas public projects covers the rest of that calendar.

The general contractor received the retainage and did not pass it on

Then two statutes apply. The Prompt Payment Act requires the contractor to pay each subcontractor its share within seven days of receiving the owner's payment, including the retainage once the owner releases it (§ 28.002). And retainage the contractor receives from the owner is trust funds under the Construction Trust Fund Act; a contractor or its officers who use it for anything other than paying the subcontractors and suppliers on that project, before those obligations are met, risk personal liability. The Texas Construction Trust Fund Act explains the claim and its defenses.

What usually decides a retainage case

• Whether the release conditions in the contract were actually met, and who has the paperwork to prove it.
• Whether withholding was tied to a specific good faith dispute and kept within the statutory cap.
• Whether the subcontractor sent the retainage notice within 30 days of finishing its own work.
• Whether the owner held the reserved funds for the full 30 days or paid the general contractor early.
• On public work, whether the percentage held exceeded the cap or continued after completion.

Tina Wysk represents owners, general contractors and subcontractors in retainage and final payment disputes in Dallas–Fort Worth.