Retainage Protection - Part 1

One recurring problem we’ve been seeing in our practice over the last 6 months is sub-contractors having problems collecting their retainage. I’ve written before about the legal timing requirements for notices and perfecting a claim, today I want to spend some time discussing some of the practical aspects of collecting what is due.

The Texas Property Code §53.101 requires owners to retain ten percent of the contract price or value of the work completed. According to the Property Code, this is done to secure payments owed to subcontractors, suppliers, providers of specially fabricated material, etc. The Property Code does not require the main contractor to hold back retainage from their sub-contractors, but they frequently do. Why? Because they can—and because holding back retainage does wonders for the main contractor’s cash flow during the project, plus it provides a buffer in the event of charge backs from the owner for non-conforming work. Sub-contractors, especially those who complete their work early in the project, bear the burden of this payment structure. They have to suffer the impact on their cash flow waiting for project completion, keep up with statutory notices, bear the risk that all notices have been completed correctly, and that there will be money at the end of the project for all.
When it comes to non-payment or slow payment of retainage, there is no doubt that sometimes those funds are held back for legitimate reasons. But other times it appears GCs may be trying to make up for under bid contracts, their own mistakes, or they are just un-scrupulous and are trying to keep money on the back end that some sub-contractors are not willing to expend the time or money to collect. But if you had a million dollar contract, $100,000 isn’t anything to just let go—especially since that “back end” money is where the sub-contractor often finds his profit. Even if you have provided all the statutory notices to support your claim, you might still face resistance.

Most contractors get in the business to actually build things, but to be successful one strong trait you must have to collect all the money owed to you is to be very good with paperwork. This is especially true when it comes to protecting your claim for retainage. You want to build things—but not for free.

Few enjoy the paperwork side of a job. It can be complicated, and it is certainly time consuming. If everything goes well on a project, it may seem like a waste of time. But remember that documentation is for those times that the project doesn’t go well—which is almost impossible to predict. Even if your portion of a project goes better than expected, when it comes time to collect retainage, your claim will be resolved at the same time as everyone else. That might make collection difficult if there were cost overruns or problems on other aspects of the job.
What do we typically see that GC’s and Contractors use to keep from paying you your retainage?

Delays. Ever worked on a project with delays? Keep a calendar log of every day on the job, what happened, progress made, problems encountered etc. If there is a delay note how long, why it occurred and who is responsible. One reason frequently given for holding back retainage are chargebacks due to “delays.” Your calendar log will help defend your claim if you are being blamed when it comes time to collect your retainage. You won’t be able to rely on your memory alone to recall what happened on a particular Wednesday afternoon six months ago. If you were not the responsible party your documentation will help you recall if there really was a delay as claimed and provide proof that it wasn’t you.

“Man the Job” Notice. Ever received one of these? What did you do? Recognize that sometimes these are sent to justify non-payment of retainage at the end of the project. Don’t just show back up and ignore formal response to the letter. A calm, professional response is required to any letter you receive with an explanation as to what has occurred and what is required to be able to move forward with the work. This is true even if the problem is solved by the time the response is made—in that case document what the problem was, and the solution that was reached.

Change orders, back charges, scope of work. No matter how much planning is done at the outset of a project, changes are almost inevitable once actual construction starts. Proper documentation is important from the beginning. When you first receive the scope of work you should verify the scope, make sure it is specific, and if there is anything that is not included, then make sure it is specifically excluded within the contract terms. Properly documented change orders establish what was expected under the contract, what the change is, as well as the adjustments to payment and retainage. When it comes time to collect retainage, relying on a handshake agreement to changes on the job won’t hold up. The person you dealt with day to day on the Project may have little, if any, input into releasing retained funds. Also, what if that person is no longer with the company? Correctly documented change orders can be linked to the scope of work if it was not included in the original contract and help you provide proof of the amount owed to you.

You worked hard on the Project, you take pride in your work and you should be fairly paid. Don’t take short cuts on the paperwork. Such shortcuts may turn into cutting you short on your bottom line!