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Protecting yourself on billed retainage

Hello, I was wondering in the states of NC and SC how contractors typically protect themselves on billed retainage. Typically we bill retainage when we are finished with the project and then it may be months before we collect that retainage because we are told that we get that paid to us when the GC gets paid their final retainage from the owner. So my questions are 1) how do you properly protect your lien rights on that billed retainage without actually filing a lien and ticking off a bunch of customers and 2) is that typical in the state of SC to get paid retainage when the owner gets paid their retainage? Thanks so much for the help!

2 replies

Mar 16, 2020

North Carolina and South Carolina don't have regulations on when retainage must be released, so unlike some other states, there isn't really a statutory rule forcing the release of retainage. That means, generally, that retainage should be released in accordance with the contracts being used. In practice, however: It's extremely common for a GC to expect their subs and suppliers to wait until the GC receives its retainage before releasing retainage down the chain. However, that doesn't mean that mechanics lien rights aren't available on retainage. Let's first look at when retainage should be released. Then, we'll look at some tools for securing retainage payments (and even speeding them up).

When should retainage be paid on North Carolina and South Carolina construction projects?

As mentioned above, retainage for projects in the Carolinas should generally follow contractual agreements. So, if the contract states when retainage will be paid out, then that's when it should be paid. If there's an enforceable pay when paid provision in place, then a subcontractor will need to wait until their customer gets paid before they're entitled to be paid their retainage. Though, if retainage is being withheld an unreasonable amount of time, the customer must still pay out retainage. Unlike with a pay if paid provision, a pay when paid provision only shifts the time for making payment - and it doesn't actually mean that if the customer doesn't get paid, the subcontractor won't get paid. Instead, payment must be made within a reasonable time. If the contract is silent about when retainage should be paid out, and if there isn't a pay when paid provision in the agreement, then the timing for when retainage should be released falls into a bit of a grey area. Allowing a customer some reasonable amount of time may make sense, especially if you've agreed to secure retainage payments in some way.

How to secure retainage payments

As you mentioned above, mechanics liens are an excellent way to secure retainage payments. As you also mentioned, there can be a little tension between retainage timeframes and mechanics lien deadlines. North Carolina's mechanics lien deadline is 120 days from the claimant's last furnishing of labor or materials, and South Carolina's mechanics lien deadline is 90 days after last furnishing. That creates some issues for subs and suppliers' whose work is done well before project completion. As you mention above, GC's won't want to release retainage until they get it, themselves - and that will be long after many subs and suppliers leave the job. It makes sense that subs and suppliers don't want to create issues by filing liens well. But, it's also crucial for small businesses to secure payment - and, mechanics lien deadlines won't wait for retainage. Once the time to lien has passed, claimants will have to look to other options - like filing a lawsuit - to recover retainage. It might be helpful to try and work out some kind of retainage security with the customer. Letting them know you're aware of your lien rights but that you'd rather not use them could help to get the customer to either release retainage for your work sooner, or it could at least push them to do something else - like enter into a promissory note, a joint check agreement, a guarantee, etc.

Preserving lien rights while maintaining relationships

First, in order to preserve mechanics lien rights, it's important to send all required notices. Both North Carolina and South Carolina have some notice requirements that subs should keep in mind. And, as long as those requirements are followed, then mechanics lien rights can be fully protected up to and until the lien deadlines discussed above. For more information on those deadlines: (1) North Carolina Preliminary Notice Guide and FAQs; and (2) South Carolina Preliminary Notice Guide and FAQs. In addition to those required notices, it's also a good idea to give customers opportunities to pay or discuss a debt a few times before the debt is escalated to the point of a lien claim. Sending regular invoice reminders to try and nudge a customer to do the right thing is a proven way to push for payment while keeping relationships intact (or even strengthening them). If things must escalate some, it can help to take additional steps before filing a lien, too. Sending a demand letter will let them know you're serious about getting paid, but it will also provide an opportunity for the customer to make payment and avoid potential claims. The same is true for a Notice of Intent to Lien. Sending a Notice of Intent to Lien can let the customer, GC, project owner, or any other recipients know about a payment dispute on the job - and making the dispute known to others can help to put pressure on the customer or allow others to step in and make sure payment is made.

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Mar 18, 2020

Matthew, thanks so much for that thorough and detailed response. That is very helpful and I appreciate the insight!

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