Texas Retainage vs. Reserved Funds- What's the difference & why it matters

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Retainage: It’s been a hot button topic in the construction industry for years. Given the slim profit margins on construction projects, retainage practices can be incredibly frustrating for contractors. However, it does provide some needed assurances and benefits to the project stakeholders.

In Texas, there are technically two different types of “retainage,” one referred to as such, and the other referred to as “reserved funds.” The distinction between the two depends on who is withholding those funds. Let’s take a closer look at what the difference is between the two, and how it can affect your ability to recoup these withheld amounts.

Texas lien law: ‘Retainage’ or ‘reserved funds’?

In 2021, Texas enacted some sweeping changes to the mechanics lien process effective on projects where the original contract was entered into on or after January 1, 2022. The main changes came in the form of simplified notice procedures and lien filing deadlines. One perhaps-overlooked change that contractors should be aware of is the introduction of a new term “reserved funds” that replaced the term “retainage” in some sections.

Note: This distinction technically still existed prior to the 2022 changes, but the terms were previously referred to as “contractual retainage” and “statutory retainage.”

But what does this mean for contractors? What’s the difference, if any, between the two?

Let’s take a look at each of these terms individually, the statutes that regulate each, and how the distinction can affect a claimant’s ability to recover these amounts on private projects.

What is ‘retainage’ under the Texas Property Code?

Let’s start with retainage. This term is currently defined under Tex. Prop. Code §53.001:

“(11) ‘Retainage’ means an amount representing part of a contract payment that is not required to be paid to the claimant within the month following the month in which labor is performed, material furnished, or specially fabricated material; is delivered.”

Those in the construction industry should be familiar with this definition. Generally, retainage is a certain percentage of a contract amount withheld that is payable upon satisfactory completion of the project. But under Texas law, this definition could apply to “retainage” as well as “reserved funds.” The key distinction is who is withholding these amounts.

§53.025 provides some insight. This section is titled “limitation on ordinary retainage liens,” and states:

“A lien for retainage is valid only for the amount specified to be retained in the contract, including any amendments to the contract, between the claimant and the original contractor or between the claimant and a subcontractor.”

So under Texas law, “retainage” refers to amounts withheld by a contractor or subcontractor, not the amounts withheld by the owner from the general contractor.

What are ‘reserved funds’ under the Texas Property Code?

On the other hand, “reserved funds,” as hinted at above, refers to amounts withheld by the property owner from payments to the prime contractor. This withholding is specifically required under Tex. Prop. Code §53.101:

“During the progress of work under an original contract for which a mechanics lien may be claimed and for 30 days after the work under the contract is completed, the owner shall reserve:

(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 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.”

To sum up, property owners in Texas are required to withhold 10% of the contract price to cover any potential claims from subcontractors or suppliers on the project. Once the project is complete, the withheld amounts must be released within 30 days.

Making a claim against unpaid retainage/reserved funds

Here’s where the difference really matters! What if retainage or reserved funds aren’t released? Texas is a rare state that provides a mechanics lien just to recover retainage/reserved funds — but the process and timing varies.

Lien for unpaid retainage

Those who didn’t contract directly with the property owner (referred to as “derivative claimants” in Texas) there are a few things to keep in mind to ensure you get paid everything you’ve earned.

Notice of Claim for Unpaid Retainage

First and foremost, derivative claimants will need to send a Notice of Claim for Unpaid Retainage. This notice must be served on the owner (and the general contractor if hired by a subcontractor) no later than 30 days after either: A. the claimant’s contract is completed, terminated, or abandoned, or, B. the date of the original contract is terminated or abandoned — whichever is earlier.

For a full breakdown of the process and a free download see: How to Send a Texas Retainage Notice

If you forget to send this notice, that doesn’t necessarily mean that you can’t recover retained amounts with a mechanics lien. Under the statute governing this notice, it specifically states, “To the extent that a claim for unpaid retainage is not included wholly or partly in a notice provided under Section 53.056, a claimant other than an original contractor whose contract provides for retainage must give notice under this section for a lien for unpaid retainage to be valid…”

In other words, if the amounts withheld were included in your monthly notices, then this notice won’t be necessary to be able to lien for any unpaid retainage withheld on your subcontract. Granted this may be a little tricky for your accounting department to keep track of. The best (and safest) practice is to send this notice out on every project where retainage is being withheld.

Deadline to file a lien on unpaid retainage

As far as when a claim may be filed, the deadline for liens on retainage can be found under §53.052:

“(d) A claimant other than an original contractor claiming a lien for retainage must file an affidavit with the county clerk not later than the 15th day of the 3rd month after the month in which the original contract under which the claimant performed was completed, terminated, or abandoned.”

So the deadline to file a lien claim on unpaid retainage is the 15th day of the third month after the project is completed.

The same caveat with the notices applies to lien claims. If retainage amounts were included in your monthly notices, then those amount may be included in your general lien claim with the applicable deadline.

Lien on reserved funds

Now, as far as making a lien claim on “reserved funds,” this deadline can be found under Tex. Prop. Code §53.103:

“A claimant has a lien on the reserved funds if the claimant:

  1. Sends the notices required by this chapter in the time and manner required; and
  2. Except as allowed by Section 53.057(f) files an affidavit claimant a lien not later than the 30th day after the earliest of the date:

(A) The work is completed;
(B) The original contract is terminated; or
(C) The original contractor abandons performance under the original contract.”

In short, direct contractors looking to file a lien claim for unpaid reserved funds, the deadline to file is 30 days after their contract is either complete, terminated, or abandoned. This is a pretty tight window, so keep a close eye on your deadline. If there’s any indication that the owner might not release these funds, it may be time to file a claim.

A quick review of retainage vs reserved funds

The mechanics lien laws in Texas, despite the recent changes to simply the process, are still fairly complex. Which is why Texas contractors must be sure that they understand each aspect and nuance to ensure they get paid what they’ve earned. As far as retainage and reserved funds in Texas, here’s a quick recap:

Texas retainage are amounts that are withheld by a contractor or a sub pursuant to the terms of their contract; more specifically their subcontract. To protect your right to recover these payments, a Notice of Unpaid Retainage must generally be sent 30 days after the claimant finishes their scope of work. If this doesn’t yield results, then a lien claim may be filed no later than the 15th of the third month after the entire project reaches completion.

Texas reserved funds are amounts that are statutorily required to be withheld by the property owner from the general (prime) contractor. No notice is required to secure your right to file a lien on reserved funds, but the timeframe to file such a lien is tight: generally 30 days after the project is completed.

Need more help? Get some answers from a Texas construction attorney in the Levelset Community.

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