Retainage, although controversial, is just a part of conducting business in the construction industry at this point. So owners, contractors, and subs alike should ensure that they understand all of their rights, and more importantly, their obligations under their state retainage laws.
For example, in Tennesse when retainage is being withheld, the party withholding retainage must deposit the funds in a separate, interest-bearing, escrow account. Failure to do so can lead to a $300 per day penalty in damages. Which can add up quickly, as a recent Tennessee Supreme Court case held that a GC can be liable for $300 per day for the year leading to a subcontractor’s lawsuit.
Retainage requirements in Tennessee
The Tennessee Prompt Payment Act was enacted to ensure timely payments are made to contractors on both public and private projects. In addition to setting deadlines for payments, it also strictly regulates the withholding of retainage, which cannot exceed 5% of the total contract price. This amount is generally aligned with the average amount that can be withheld across the US.
However, Tennessee takes it a step further (as some states do) by requiring withheld retainage to be deposited in an interest-bearing, escrow account, and the failure to do so comes with some steep penalties.
“If the party withholding funds fails to deposit funds into an escrow account as provided in this section, then the party shall pay the owner of the retained funds an additional three hundred dollars ($300) per day as damages, not as a penalty, for each and every day that the retained funds are not deposited in an escrow account.”
A recent Tennessee Supreme Court case clarified the extent of these penalties when it held that the penalties still apply, even if a claim under the Prompt Pay Act is filed late.
Contractor fails to deposit retainage in escrow for 3 years
The case in question is Snake Steel, Inc. v. Holladay Construction Group, LLC.
- Owner: 2200 Charlotte Avenue, LLC (2200 Charlotte)
- General Contractor: Holladay Construction Group, LLC (Holladay)
- Subcontractor: Snake Steel, Inc. (Snake Steel)
Snake Steel was hired by Holladay in 2013 as a subcontractor to provide “structural and miscellaneous steel” on the project owned by 2200 Charlotte. As allowed in Tennessee, the subcontract provided for 5% retainage to be withheld until Snake Steel substantially completed its work.
Snake Steel completed the work under the contract in late 2014 and was paid all amounts, minus the $18K worth of retainage and unpaid amounts owed for additional change order work. In May of the following year, 2200 Charlotte had released all withheld retainage to Holladay, but Holladay failed to release the retainage withheld from Snake Steel.
In 2017, three years after Snake Steel’s completion of work, Snake filed suit against Holladay under claims of breach of contract and the TN Prompt Payment Act for failing to deposit retainage in an escrow account. Which, apparently, neither party was aware that depositing retainage in escrow was a requirement.
A month after the lawsuit was filed, Holladay paid Snake Steel the $18,000 worth of retainage, leaving the issue of damages under the Prompt Pay Act to the courts.
At trial, the trial court noted that the statute of limitations to make a claim under TN’s Prompt Pay Act is one year — making the lawsuit untimely, and the claim was dismissed. Snake Steel appealed.
$300 penalty per day for each and every day
The Appeals Court affirmed the trial court’s application of the one-year statute of limitations — but also held that Snake Steel could still recover the $300 per day statutory penalties for the one-year period prior to the filing of the complaint. Which, if you crunch the numbers, is $109,500 in penalties! Holladay then appealed to the Supreme Court.
The Supreme Court agreed with the Appeals Court decision, citing that the purpose of the Prompt Pay Act (and more specifically the $300 per day damages):
“… is to prevent the very wrong done in this case – for years after Snake Steel completed its work, Holladay received the benefit and use of retainage that rightfully belonged to Snake Steel. The statutory framework indicates the legislature’s resolve to make it not worthwhile for contractors such as Holladay to abuse the lawful mechanism of withholding retainage to ensure completion of work. Interpreting section 66-34-104(c) to assess the statutory penalty anew each day reflects the natural and ordinary meaning of the statutory languaga and aligns with the context and purpose of the Prompt Pay Act as a whole.”
Tennessee’s prompt pay requirements are strictly enforced
This is huge, especially considering that the amount of retainage was only $18,000 — but the statutory penalties amount to roughly six times as much!
We reached out to Greg Cashion, one of the attorneys on the case, and this was his reaction to the holding:
“Tennessee has one of the most stringent prompt payment requirements in the nation, and it takes out-of-state contractors by surprise,” Cashion said. “The bottom line is, you must make sure that you have the retainage paid into a separate, interest-bearing escrow account with a third party.”
“The worst thing you can do at the end of the job is not to pay out to the sub. In Snake Steel, the general contractor did not pay the subcontractor its retainage for three years. It is important to know the Tennessee retainage law because there are many contractors in the past few years that have suffered large financial penalties due to their failure to know and comply with the law. You just have to do it.”