What is Retainage?
Retainage is defined as “…a portion of the agreed-upon contract price deliberately withheld until the work is substantially complete to assure that contractor or subcontractor will satisfy its obligations and complete a construction project.” Although Tennessee enacted a construction retainage statue many years ago, the law was often ignored. As of July 1, 2012, amendments to the retainage statue heightened the penalties for failing to correctly withhold, deposit and release retainage. The updated statues also include new administrative and notice requirements.
Now under “Subsection (e) of Tennessee Code Section 66-34-103, failure of an owner to escrow retainage is now a Class A misdemeanor, punishable by a fine of $3,000 per day for each day that retainage is not escrowed. The new statute mandates that owners strictly comply with the escrow account requirements, or be exposed to very severe penalties.”
Primary Changes in the Tennessee Construction Retainage Law
- The amount withheld from a construction contract is limited to 5% unlike the historical 10%
- If the contract is more than $500,000, the retained amount “shall” be put in an “interest-bearing” escrow account with a third party, typically the lender. The escrow interest earned becomes the “property” of the contractor or subcontractor. Additionally, the escrow account “must be established upon the withholding of any retainage” which means a proper escrow account must first be created before any retainage can occur.
- The retained amount and earned interest “shall” be released within 90 days of completion of the “work.”
- All retainage, including retainage on work not completed at the time of substantial completion, must be paid within 90 days after the contractor has completed all of the work and all terms and conditions of the contract.
New Administrative and Notice Requirements
The updated statues establish that the withholding entity has an “affirmative duty” to provide written notice to the contractor who has complied with the escrow requirements. This notification occurs “upon withholding” of the retained funds “from each and every application for payment.”
Each notice must include:
- Identity of the financial institution where the escrow account has been created.
- The related account number of this escrow account
- The amount of retained funds deposited into this account.