How familiar are you with the intricacies of your state’s prompt pay law? For example, does your state have one? If so, what are your remedies for late payment? Can the party withholding your money (contractor or owner) get an excuse for non­payment by claiming backcharges? Are there limitations on what kinds of jobs the prompt pay law applies to? 

The answers to these questions may not be simple, as each state seems to have come up with its own unique rules. Complicated? Yes, particularly for electrical contractors with multistate work. Making matters a little more complex is how contract retention is treated, if at all, by prompt pay laws. I will use the statute from Tennessee as a case study for this review. 

Arguments for retention

As between an owner and a general contractor, the typical arguments for a holdback are to protect the owner from possible contractor liens, to have some money to pay for incomplete or defective work, to offset delay damages and to induce the general contractor to finish on time. 

On a small job, these arguments are not convincing. On large jobs, a 10% retention may seem excessive. In addition, I have come across general contractors who, as a standard practice, keep the retention for themselves at the end of the project. Mainly because the rationale for retainage is somewhat unconvincing, a number of states have amended their prompt pay laws so that maximum retention cannot exceed 5% of contract value. 

What happens to the retention money over the lifetime of the project, which may be a year or more? Is it fair to the general contractor to hold 5% or 10% of your money for a long period of time while perhaps earning interest on those funds? 

What Tennessee did

Tennessee is one of many states that have mandated by statute that the maximum allowable retention is 5%. (Prompt Pay Act, Tenn. Code §66-34-101.) How the 5% is handled when the contract value exceeds $500,000 is worth noting. 

Whoever is holding the 5%—the owner, the general contractor or you the subcontractor (if you have a sub-subcontractor)—must put the funds in an interest-bearing escrow account and must tell the one whose retention it has where the account is located and its number. This escrow account is important. It means that the 5% holdback is acknowledged to be the other party’s money. 

For example, if the general contractor is holding your money and later goes out of business or files for bankruptcy, your retention is safe. However, the statute gives no direction on how the escrow account works or under what conditions the retention is released. For example, what happens if the job never reaches substantial completion?

The statute specifies what happens if the general contractor does not create the required escrow account. A violation of this law means that, as compensation, the general contractor must pay the subcontractor $300 per day for every day that there is no escrow account. So, even if you get your 5% retention at the end of the job, you still have a right to be paid $300 a day if there was no escrow account during the job. This escrow requirement cannot be waived by contract. 

A decision by the Tennessee Supreme Court in 2021 shows how serious this retention law is. In the unique facts of that case, a contractor paid its sub the full retained amount at the end of the job but had not created an escrow account. The violation of the Prompt Pay Act entitled the subcontractor to $300 a day for one year, which amounted to $109,500. The retention had only been $18,000 [Snake Steel Inc. v. Holladay Construction Group LLC, 525 S.W. 3d 830 (Tenn. 2021)].

Conclusion

The scope and content of prompt payment and retention laws vary greatly from state to state and also from year to year. You need to keep vigilant in maintaining an up-to-date summary of your rights and liabilities under these statutes. In places like Tennessee, where the general contractor bears the burden and cost of establishing multiple escrow accounts for all of its subs, you may have a convincing argument to get the general to forget about retention and delete it from your subcontract. 

Goodbye, fond readers

This is the last article I’ve written for ­ELECTRICAL CONTRACTOR magazine. I hope I have helped you along the way. My best wishes for your continuing success.

stock.adobe.com / Lisa