Retainage

An owner has a statutory duty to retain 10 percent of the money due an original contractor during the progress of work under an original contract, and for 30 days after completion of the contract for the benefit and protection of derivative claimants.

What Retainage Is and Why It Exists

Texas law requires a property owner to withhold (or “retain”) a percentage of every payment made to a general contractor during the progress of a construction project. This withheld money is called retainage, and it exists specifically to protect subcontractors and materialmen.

The logic is straightforward: if the owner pays the general contractor in full as the project progresses, and the GC then fails to pay its subcontractors, those subcontractors may have no practical source of recovery beyond the GC itself, which may be insolvent. Retainage creates a fund in the owner’s hands that subcontractors can reach even when the GC has failed them.

How Retainage Is Calculated

The 10 percent retained may be either 10 percent of the contract price of the work to the owner or 10 percent of the value of the work done. In the second instance, the amount is measured by the proportion that the work done bears to the work to be done, using the contract price. If there is no contract price, the reasonable value of the completed work is used.

When the Duty to Retain Ends

The owner’s duty to retain funds is measured from actual completion of all work under an original contract. Completion means “the actual completion of the work, including any extras or change orders reasonably required or contemplated under the original contract.” Thus, an architect’s certification of completion at a particular date may not be determinative if actual work is performed after the date specified in the architect’s certification. In that event, funds must be retained for the full 30 days after completion of the actual work performed, and merely retaining funds for 30 days after the date specified in the architect’s certification does not fulfill statutory requirements.

Retainage When a Contract Is Terminated or Abandoned

The duty to retain is contract-specific, so that if an original contract is terminated or abandoned, and the owner hires a substitute contractor to complete the work, the owner’s duty of retainage is measured from the termination or abandonment of the first contract, not from the ultimate completion of the work under the replacement contract.

However, if a subcontractor is entitled to or has requested notification from the owner of termination or abandonment of the original contract, and the owner fails to provide that notice, the failure of the subcontractor to file the lien affidavit within 30 days of termination or abandonment will not prevent the retainage lien from attaching.

How a Subcontractor Claims Against Retainage

A subcontractor or supplier who has not been paid has rights in the owner’s retainage fund. To assert those rights, send pre-lien notice on time: the required written notice to both the owner and the general contractor by the 15th day of the third month following each month in which labor or materials were furnished. Missing this notice deadline can eliminate lien rights, including rights in the retainage fund.

If claiming contractual retainage specifically, a separate written notice of contractual retainage claim must also be sent to the owner and the original contractor no later than the 30th day after the date the subcontractor’s contract is completed, terminated, or abandoned. This notice preserves the right to claim the retainage amounts specifically, in addition to any other amounts owed.

Personal Liability of the Owner Who Pays Early

If an owner fails to retain the required funds and pays the general contractor more than the owner is entitled to pay at that time, in other words, if the owner pays out retainage before the 30-day period expires, the owner becomes personally liable to subcontractors and materialmen who have perfected their liens for the difference between what was paid and what should have been withheld.

An owner who is held personally liable for failure to retain has a corresponding right of action against the general contractor for reimbursement. However, as the Lien Law Generalities page notes, this right is often hollow; the GC who failed to pay subcontractors is typically the same GC who lacks the resources to reimburse the owner.

When Retainage Does Not Apply

An owner can eliminate the retainage requirement entirely by requiring the general contractor to obtain and post a payment bond before work begins. When a valid payment bond issued by a corporate surety is in place, subcontractors and materialmen have no claim against the owner and no right to assert a lien against the property. Their sole remedy is a claim against the bond fund. See our Payment Bonds page for details.