Your responsibilities and risks concerning retainage in Tennessee
Retainage is an important component of commercial construction projects, and a good understanding of any retainage-related issues can give you significant leverage over contractors while the work is being completed. That being said, it’s important to note that as an owner or developer, you face significant exposure for mishandling retainage. In the previous post, I discussed whether owners in Tennessee are required to withhold retainage and exactly how much retainage is allowed to be withheld. This post aims to answer a few more questions regarding the proper handling of retainage.
Where do I keep the retainage?
This is arguably the biggest mistake owners make with respect to retainage on Tennessee construction projects. Where the general construction contract is greater than $500,000, the Prompt Pay Act dictates that the retainage be “deposited in a separate, interest-bearing, escrow account with a third party which must be established upon the withholding of any retainage.” And if you fail to keep the retainage in such an account, owners have to pay the proper recipient of the retained funds “an additional three hundred dollar ($300) penalty per day for each and every day that such retained funds are not deposited into such escrow account.” Failing to keep the retainage in a third party interest-bearing escrow account is also a Class A misdemeanor criminal offense, subject to a $3,000 per day fine.
In addition to depositing the retainage in a proper escrow account, owners have the “affirmative duty to provide written notice” to the general contractor providing (1) the name of the financial institution where the escrow account has been established; (2) the account number; and (3) the amount of retained funds that are deposited in the escrow account. If the general contract is less than $500,000, however, these requirements concerning the handling of retainage do not apply.
When am I required to pay the retainage?
The Prompt Pay Act is not a model of clarity on this issue. Under one section of the Prompt Pay Act, owners are required to release retainage “within ninety (90) days after completion of the work or within ninety (90) days after substantial completion of the project for work completed, whichever occurs first.” Another section, however, provides that the retainage must be paid within 90 days after the owner “(1) has received a use and/or occupancy permit for an improvement from a governmental agency lawfully issuing such permit; (2) has received a certificate of substantial completion from an architect charged with supervision of the construction of an improvement; or (3) begins to use or could have begun to use an improvement.” To ensure compliance with the Prompt Pay Act, owners should pay the retainage within 90 days from the occurrence of the earliest of these various milestones.
If you do not timely pay the retainage, you will face the same penalties that are imposed for holding too much retainage, which we covered in Part 1 of this series: (1) Class A misdemeanor criminal offense; (2) $3,000 per day fine, with each day being considered a separate offense; and (3) restitution of the retained funds. Thus, it is important for owners to understand the importance of these end-of-project milestones, and to track the milestones in conjunction with releasing withheld retainage.
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In summary, if the general contract for a project exceeds $500,000, owners must maintain the retainage in an interest-bearing escrow account with a third party. And regardless of the size of the project, retainage must be released within 90 days from the earliest of substantial completion, receiving a use and occupancy permit, or using the improved property.
In the final installment of our retainage series, I will address one of the most complicated questions owners face: can I withhold retainage as a setoff for other claims?
Missed Part One of this series? Click here to read.