The following is adapted from Quit Getting Stiffed.
Do you know your profit margin on your projects? Is it more than 10%? You are a real badass if you make a 10% margin on your projects; keep up the good work! But for most contractors, 10% is most, if not all, of their profit on a project. So, why do so many contractors just walk away from retainage? Retainage is where the profit is. Don’t you want to make a profit?
Don’t just walk away from your profit. If you haven’t already, make sure to read the book, Quit Getting Stiffed, and follow our foolproof collection method so that you collect everything that you are owed, every time, INCLUDING retainage!
New Texas laws change retainage
The updates to the Texas lien laws change what retainage means. The new definition of retainage is any amount that is not required to be paid in the month following the performance of the work. If you have a contract where part of your payment is withheld for payment at a later date, that is considered retainage. The new laws also change the requirement for a lien for retainage needing to be filed within 30 days of final completion.
Under the new law, you have until the 15th of the third month after the original contract you are working under is complete, abandoned, or terminated. To have a valid lien for retainage, you must also send notice of unpaid retainage to the owner and original contractor the earlier of 30 days from completion of your contract or 30 days after completion, abandonment, or termination of the original contract.
What used to be referred to as retainage—10% of an original contract amount—is now referred to as “Reserved Funds.” All of the same rules that surround retainage are the same rules that apply to reserved funds.
Negotiate Better Construction Contracts
At The Cromeens Law Firm, we have extensive knowledge and understanding of construction contract laws and are licensed in Texas, Georgia, and California. We are often able to solve contract disputes for our clients through informal negotiations, mediation, or arbitration. Work with us to equip yourself with the ability to properly evaluate your risks before you sign and negotiate your next subcontract with greater confidence and ease.
Why reserved funds are so important
Reserved Funds can limit the owner’s liability to lien claimants in two ways.
- Reserved Funds can limit the amount the owner is required to pay lien claimants. If the owner properly withholds the 10% from the general contractor, the 10% is the only liability they will have to lien claimants. This means that if the total of all the amounts due to lien claimants is more than retainage, the lien claimants will have to share the retainage pro rata. The owner will not have to pay them all in full. Instead, their only liability is the amount of reserved funds.
- The owner can limit their liability to lien claimants by shortening the deadline to file a lien. In Texas, normally, a lien claimant has until the 15th of the third or fourth month, depending on the type of project, after they last supplied labor or materials to file their lien. If the owner properly withholds reserved funds from the general contractor, the timeframe for lien claimants to file their liens is shortened to thirty days after final completion regardless of when they performed their work or supplied materials. This is why your lien must always be filed within thirty days of final completion, regardless of where you are in the normal lien process.
Want to be paid retainage? File a lien.
To be paid retainage in a timely manner, or even at all, you need to file a lien. Include the cost of filing a lien into your project cost and plan on filing a lien to collect your retainage. If you don’t file a lien, that means the general contractor may pay your retainage once they are paid retainage, but they will do that on their own timeframe, or in most cases, not at all. Secure your right to timely payment of your retainage and file a lien.
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Do not walk away from your retainage payment!
Most, if not all, of your profit for your project is in the retainage payment. Don’t just walk away from retainage! I hear all the time, “If I file a lien, this general contractor will never hire me again.” If it is going to cost you money to have a customer, they are not worth having. If you don’t make a profit on a project, that means you did not make money. Even worse, if you lost money on a project, that means you paid to work for the general contractor. How long do you think you can stay in business if you are paying the general contractor to go to work every day and not make a profit?
Collecting your money is essential to any successful business. The faster you collect it, the better.
Protecting your right to payment and protecting your bottom line is crucial as a business owner in the construction industry. Filing liens and collecting your retainage for each project is the most cost-effective way to protect your business; ending up in protracted litigation to collect your money is never a win. For questions or help with the lien deadlines for your state, visit subcontractorinstitute.com. Our team of construction lawyers and collection specialists at The Cromeens Law Firm is committed to helping you collect the money that you are owed. If you need help filing a lien to collect retainage, contact us today to set up a free consultation at 713-715-7334.
For more advice on a Texas contractor’s collection and lien rights, you can find Quit Getting Stiffed on Amazon. You can also find materials referenced in Quit Getting Stiffed, this blog, and correlating information on collection and lien rights for all 50 states in the U.S. at www.subcontractorinstitute.com.
About Karalynn Cromeens
Author of Quit Getting Screwed, Understanding and Negotiating the Subcontract, and creator of The Subcontractor Institute, has been a licensed attorney for more than seventeen years. She has spent her entire legal career in construction law, advising countless clients on how to avoid litigation. Karalynn is on a mission to educate and inform subcontractors about the importance of understanding their lien and collections rights, sparking change and leveling the playing field in the construction industry.
This article is intended as a general educational overview of the subject matter and is not intended to be a comprehensive survey of recent jurisprudence, nor a substitute for legal advice for a specific legal matter. If you have a legal issue, consult an attorney.