Even thought the practice of retainage is widespread in the construction industry, successfully navigating the burden of retainage can be challenging and confusing. It really doesn’t matter if your company’s construction projects always include retainage, or if you’re just encountering retainage for the first time on a project, we are constantly getting questions about retainage from all manner of construction companies, from both experienced shops and those that are relatively new to the industry. Here are some tips to think about regarding retainage in general and how it may affect your lien rights in particular.
Why Does Retainage Exist?
Retainage was first-created in the United Kingdom in the 1840s to give owners protection against contractor performance issues and as a hedge against defective, deficient, or uncompleted work (which was a very real and very common problem at the time.)
A century-and-a-half later, not only does retainage still exist, it’s widely accepted in the construction industry. Unfortunately, the practice has become notorious for the added difficulty it brings to the already challenging system of payments in the construction industry. And this difficulty further muddies the already confusing mechanics lien process.
Will Retainage Affect My Lien Deadline?
First off, ALL construction companies need to know the following:
Retainage does NOT extend your lien deadline.
In fact, you may find that you are not going to be able to collect retainage until well past your lien deadline has already come and gone. Here are a few strategies to consider in order to secure payment through lien rights management while also navigating the added burden of retainage:
Knowledge is power. Understand the amount of retainage that can be withheld and the timeline for being able to withhold this payment. It’s best to know the limitations of retainage prior to commencing work, and how to make a claim based on the state you work in.
Send a preliminary notice. States like Texas have required preliminary notices used specifically for retainage (see: Notice of Contractual Retainage). Other states like California asks that a direct contractor give the owner, or a subcontractor give the direct contractor, notice that work in dispute has been completed in accordance with the contract. More transparency on your end will only prioritize your invoices.
If you don’t like the idea of filing a lien, try sending a Notice of Intent to Lien. While generally a voluntary notice and typically not recorded, it will act as a reminder to the owner/parties up the food chain that there is still payment to be made with potential consequences if it’s not.
Consider filing a lien. Most retainage statutes in the private sector will serve the sole purpose of preventing abuses by providing punishments if retainage is held without authorization or if an unreasonable amount of retainage is withheld. Filing a mechanics lien within your deadline can include the retainage amount.