Holding back statutory 10% retainage

Beth LaPennaApril 2, 2014

I am on the brink of signing a cost plus 10% contract with the builder I have selected. In TX, (maybe everywhere), it is strongly recommended that I hold back 10% "statutory retainage" for 30 days after contract completion to protect me in the event that my contractor doesn't pay his subs or suppliers OR he pays them, but say, the foundation guy doesn't pay his concrete supplier. It keeps me from being personally liable for the concrete and can prevent a lien from being filed on my property.

My lawyer is advising me to withold the 10% which I wholheartedly agree with, but I can hear my builder saying that I have just eliminated his 10% commission and he will have to wait 9 mos. for it. Any ideas on how to handle this with my builder?

This post was edited by BuildinginTXhillctry on Wed, Apr 2, 14 at 19:30

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Sophie Wheeler

10% is an abysmally small fee for a true custom build. That won't cover overhead for most builders, much less turn a profit. I personally wouldn't expect a builder to even sign a deal with a 10% holdback with a fee that small. I also would also expect him to have other revenue streams outside of your oversight to make up for the negotiated loss of the apparent contract. Unless you're paying overhead as a separate line and the 10 is just the profit?

    Bookmark   April 2, 2014 at 8:37PM
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In a Cost of the Work contract the contractor's off-site overhead is included in the "fee" and on-site overhead is included in the Cost of the Work.

Retainage should not be more than half of the contractor's fee unless he is doing a large part of the work with his own forces or he is being paid for his time on the project as a cost of the work, etc. It should be withheld from each payment but the amount of the retainage should be reduced a little at a time in the last several payments. Withholding the entire fee until the project is completed might put many small contractors out of business.

Describing retainage as "statutory" is puzzling. Is there a law in your area that requires a contractor to forgo a profit until a project is complete? Is it required to be held in escrow? I would think there would not be many contractors willing to work in such a place. This level of owner protection is usually provided by a performance bond.

This post was edited by Renovator8 on Wed, Apr 2, 14 at 21:12

    Bookmark   April 2, 2014 at 8:51PM
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Beth LaPenna

I thought of the idea of witholding 5% instead of 10% as a possible compromise but my attorney said I might as well withhold nothing as I would have no protection under the statutory retainage law unless it is the full 10%. It's ironic the Texas Association of Builders' Disclosure statement for Residential Construction Projects that I was given (by another builder) says as a consumer I should withold the 10% and then the TAB builder contract specifically disallows that by saying "the builder and owner agree there will be no retainage." The Disclosure statement was previously required by law to be given to owners. Any other ideas? I appreciate all comments.

    Bookmark   April 2, 2014 at 9:31PM
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First off, do you 'know' exactly what it costs to build this house? Most homeowners have no clue what things cost that go into a build except for the obvious, flooring, lighting etc. The subs can 'easily' show you one invoice but give the GC a different one. I can't imagine a GC would build for just 10% unless you're building a mansion.
Also, after each sub finishes their job, get a lien waver from them.

    Bookmark   April 2, 2014 at 10:19PM
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I wonder, if this is common/recommended in TX and your builder is TX, if you are anticipating a problem (and ready to negotiate!) that won't actually be a problem...

Don't kid yourself; your builder has built in payment for his time and labor in addition to the 10%.... 10% isn't his only take home.

In WA, we can't hold money out that long, but our state recommends we get lien waivers from every sub. It is impractical (you probably won't know every supplier/sub), but it is one method if you find yourself needing to negotiate.

Frankly, I'd not negotiate.

    Bookmark   April 3, 2014 at 1:14AM
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As a contractor I would never, ever consider entering into a contract where any money was withheld after owner move-in. Nor do I know of any colleague builders of quality custom homes that agrees to such an arrangement.

Owner concern of non-payment of subcontractors - a very legitimate and important concern - is addressed by the lending institution or owner attorney performing a lien update on the property prior to final payment. A builder should also be required to sign an affidavit attesting to full payment of all suppliers and subcontractors prior to final payment.

Construction quality issues are addressed by completion of punch list items before final move-in, and a written warranty addresses defects which occur after move-in and within the first 12 months of occupancy.

The aforementioned notwithstanding, the reputation and up-front reference checks of your builder are perhaps even more important.

    Bookmark   April 3, 2014 at 2:30AM
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Beth LaPenna

If all the subs/suppliers sign lien waivers, how would I be protected if in my original example, the foundation guy, even though he's been paid, doesn't pay his concrete supplier? I believe my builder has integrity and pays his bills in a timely fashion, it's when we go one more person out in the chain of suppliers where I fear I have no control or influence. Is there a way to be protected there as well?

    Bookmark   April 3, 2014 at 9:43AM
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"If all the subs/suppliers sign lien waivers, how would I be protected if in my original example, the foundation guy, even though he's been paid, doesn't pay his concrete supplier?"

If your builder signs the affidavit that he has paid all of his suppliers, then it goes back to him. And that's one reason that I can't imagine any custom builder doing a job at 10%.

18-23% is more regular for a custom build in my area. That buys you complete integrity, transparency, and exceptional customer service, along with the ability for unlimited customization. As well as protection against liens from subs.

If a sub of one of the custom guys here doesn't pay his bills, the GC on the job covers it, and then his name is mud and word goes around. Then he doesn't get any business. It's part of why you use a reputable GC.

10% is tract home builder territory, and I would be stressing over the things that can come back and bite you because of the corners cut in the job. I would also be interviewing other builders who charge enough to give you peace of mind.

    Bookmark   April 3, 2014 at 10:22AM
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live_wire_oak said "If your builder signs the affidavit that he has paid all of his suppliers, then it goes back to him."

Well, this may give you an easier suit against your builder, but at least in my state (and probably in all states, absent some other law to the contrary), such an affidavit would not relieve you from a potential lien on your property by a sub. We have been involved in suits where the general didn't pay subs and was deeply in debt so the money the homeowner paid the general vanished. The homeowner ended up ponying up more money to settle the subs' claims because the builder was judgment-proof. Bad deal all around.

The safest route may be to obtain lien wavers from all major subs and suppliers. As a practical matter, this is probably not reasonable, which is why people choose to work with reputable builders.

You have a lawyer--talk to him/her about how to address potential liens. This forum is great for practical advice, but do not accept anything resembling legal advice from anyone here.

This post was edited by CamG on Thu, Apr 3, 14 at 12:56

    Bookmark   April 3, 2014 at 12:50PM
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OP is not crazy.

Section 53.101 of the Texas Property Code requires the owner of real property undergoing construction improvements to hold back (retain) 10% of the contract price until 30 days after the completion of the work. The amount is referred to as "statutory retainage" and is intended to be held for the benefit of any unpaid subs/materialmen. If the property owner fails to withhold the statutory retainage, then the property owner is liable for liens filed against the property by unpaid subs. If the owner DOES retain the statutory amount and there are any subs who didn't get paid by the builder, then (in theory), they get paid out of that 10% retained and any excess is paid over to the builder at the end of 30 days. If the 10% is not enough, then the unpaid subs share the 10% pro rata and, in theory, must go after the builder for any claims they have for additional monies.

By law, if the homeowner did NOT retain the statutory amount for 30 days, then the homeowner is liable for paying the subs AND for paying their attorney fees in order to collect payment.

OP, you need to protect yourself. Listen to your lawyer. Since Texas law says you must retain 10% of the contract amount until 30 days after the closing or be held liable for the claims of unpaid subs, then you need to retain that 10%.

Now frankly, while I am a Texas attorney, I do NOT practice construction or property law and I've never quite understood exactly how statutory retainage can fully protect the homeowner against M&M liens by unpaid subs. In Texas, subs have until "the 15th day of the third calendar month after the indebtedness accrues" to file their liens against your property if they haven't been paid. Thus, it seems to me that - even IF you retain the statutory retainage - you could still have an unpaid sub file a lien against your home MONTHS after you close with the builder and after you have gone ahead and release the 10% retainage to the builder.

For example, lets say, your have a $300,000 contract and you retain $30K statutory retainage as required by law. Your cabinet maker finishes installing all your cabinets on August 5, 2014 but does not get paid the $20K he is due. He calculates that the debt accrued to him on that date b/c that is the date he finished the job. Since November would be the third calendar month after the debt accrued, he has until November 15, 2014 to file a lien against your property.

Now, cabinet installation typically occurs near the end of a project, so your builder could easily finish the rest of the work by the end of August. So, let's say you close on August 31, 2014. On September 30, 2014, you would have to release the $30K statutory retainage to your builder. He takes his money and runs.

On November 14th, your cabinet maker files his $20K lien against your property. He has filed within his deadlines but AFTER you have released the statutory retainage amount to your builder. Do you have to pay the cabinet maker out of your own pocket? I honestly don't know... but I am sure that the construction law attorney who has advised you to withhold the statutory retainage amount CAN answer this question.

There is an alternative to statutory retainage that you and your attorney might want to look into. The Texas Property Code also allows an owner and general contractor to obtain a "payment bond" and once the bond is recorded, lien affidavits by unpaid subs do not attach against the real property but rather attach against the recorded bond. A Payment bond is usually combined with a "performance bond." The rate (cost) of buying the bond depends in large part on the credit-worthiness and reputation of the builder so it is impossible to predict how much it might cost. In any case, you might want to discuss this alternative with your lawyer and then, if your lawyer approves the idea, talk to an insurer about the cost of such a bond.

Whatever you decide to do, make your choices with the full knowledge that it is up to you (and your attorney) to protect YOUR INTERESTS and it is up to your builder to protect his interests. I think the discussion here about 10% being a low margin of profit for your builder are rather off-point because it is up to your builder to determine the percentage profit that he desires.

I will say that I agree that 10% seems like a bit of a low-ball percentage so, yes, I would be concerned that any builder who SAYS he is willing to do a cost-plus custom build for just 10% of the contract price PROBABLY intends to add some amount to every "cost" that he passes on to you (additional profit) and then take his 10% off of the inflated costs (more additional profit). You do NOT want that happening. But then again, a builder who claims to charge 15%, 20% or 30% could just as easily do the same thing. You need to talk to your lawyer about how you can insure (to the very best of your ability) that, if you enter into a cost plus contract, the costs your builder claims to have incurred and passed on to you are his ACTUAL costs and that he is not getting kick-backs from his subs/suppliers or other wise inflating those "costs" so as to increase his profits... but you need to do this regardless of the percentage profit that you finally agree to in your contract.

Good luck with your build. Keep in mind that Texas builders are almost completely unregulated so, unfortunately, I think we get some of the dregs of the industry here. Watch everything like a hawk.

    Bookmark   April 3, 2014 at 1:12PM
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Beth LaPenna

Thank you for all comments/thoughts. Bevangel, you have really gotten to the heart of the matter. I like and trust my builder and we've been working together almost 8 mos. to bring everything to the contract stage. I could be wrong, but I think I'll lose him as my builder if I withold his 10% markup which happens to be the same amount as the 10% retainage. I will look into the performance bond and see if I can get adequate protection going that route. I'm understanding there really isn't anything foolproof and believing in the integrity and honesty of my builder is paramount.

    Bookmark   April 3, 2014 at 3:05PM
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I was really hoping Bevangel would weigh in! Yay for you!

    Bookmark   April 3, 2014 at 7:59PM
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