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Examining the Penalties for Withholding Retainage in Tennessee

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When you take part in a construction project in the State of Tennessee, a portion of the total contract price is typically withheld until the project has reached a certain point demonstrating that the contractor or subcontractor has satisfactorily met the terms of their contract. This withheld amount is referred to as a “retainage.” It’s an important contractual mechanism to dissuade builders from abandoning their duties and to ensure that construction projects are completed on schedule. It also helps guarantee payment across all levels of the project by putting the funds in a third-party escrow account overseen by an impartial agent.

In this article, the Nashville contractor lawyers at Cotney Construction Law will discuss everything contractors need to know about the penalties related to the violation of the retainage policies established in § 66-34-103 of the Tennessee Code. Once the owner releases the funds in retainage to you, it’s imperative that you act quickly to compensate any relevant subcontractors so that they can compensate their sub-subcontractors and so on and so forth.

What Projects Qualify for Retainage?

In Tennessee, any construction contract, whether public or private, can incorporate a retainage agreement allowing for the withholding of retainage in an amount not exceeding five percent of the total contract price. Therefore, it’s important for contractors to understand the laws related to retainage regardless of their specialization.

Releasing Retainage

Once work on a project has been substantially or fully completed, the owner has ninety days to release all of the funds in retainage according to the terms of the contract to the general contractor. Typically, to activate the release of retainage from an escrow account, the contractor must be able to exhibit that they met the scope of work as well as the terms and conditions of the contract in which the retainage agreement is documented.

Once you receive the receipt of retainage, you must compensate any subcontractors accordingly within ten days. These subcontractors are then responsible for paying sub-subcontractors or material suppliers within ten days after receipt of the retainages is received from the general contractor. Tracking these deadlines can be confusing, so consult a Nashville contractor attorney to ensure that you get paid for your hard work.

Defaulting on Payments Results in Penalties

If you fail to provide your subcontractors with due funds from retainage, you could face penalties. When a general contractor opts to withhold retainage from their subcontractors after the owner releases the funds from the escrow account, it can result in a Class A misdemeanor and a fine of $3,000. Every additional day of noncompliance counts as a separate violation until the general contractor remediates their infraction with compliance.

If you would like to speak with one of our Nashville contractor attorneys, please contact us today.

Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.