In Tennessee, Retainage Must Be Released within 90 Days, Despite Disputes
Retainage is a familiar term in the construction industry: Retainage is an agreed amount of a contract price that is retained by one party from another, with an assurance that the party will be paid once the job is completed.
Retainage is common in construction contracts and is generally between 5%-10%.
For example, the owner may withhold 5% of the contract amount, then, once the project has been completed/accepted, the owner will release that 5% to the general contractor. Retainage is sometimes viewed as a bit of an insurance policy, or more aptly, it is leverage.
“…[T]he sole purpose of withholding retainage is to protect the project, so that if there is a dispute with the contractor, whether it is defective/incomplete work, or the project is late—assessment of delay or liquidated damages—retainage can and will be withheld from the contractor, used as leverage.” – David Taylor, author of What Lenders Need to Know
Many state statutes specifically address retainage. For example, Texas statute states the owner should withhold 10% retainage.
Sec. 53.101. Required Retainage
(a) During the progress of work under an original contract for which a mechanic’s lien may be claimed and for 30 days after the work is completed, the owner shall retain:
(1) 10 percent of the contract price of the work to the owner; or
(2) 10 percent of the value of the work, measured by the proportion that the work done bears to the work to be done, using the contract price or, if there is no contract price, using the reasonable value of the completed work.
In Tennessee, according to What Lenders Need to Know, retainage cannot exceed 5%, with a deadline provided for the release of the retainage. Per Taylor, retainage must be released within 90 days from substantial completion.
Taylor reviewed and addressed a specific Court of Appeals case which bucked the status quo on the release of retainage.
I admit, I would have assumed that releasing retainage would be conditioned on acceptance. Essentially, if the owner isn’t happy or if there is a dispute, the retainage would continue to be withheld until all issues are resolved.
Well, you know what happens when you assume…
Taylor states “The Court of Appeals ruled that, regardless of what the contract says about an owner withholding retainage, even if there is serious defective work which far exceeds the retainage amount, retainage must be released to the contractor within the 90-day period.”
Wait, does this mean what I think it means? Yes, Taylor warns “[B]e aware that even if there is a failed project, caused by the contractor, withheld retainage may have to be paid to that contractor.”
Now, this is based on a case in Tennessee, and, as you know, all states are different. But let it serve as a reminder to ensure familiarity with statutes for the states in which you furnish & if you are ever in doubt, seek a legal opinion.