Retainage Protection – Part 1

One recurring problem we’ve been seeing in our practice over the last 6 months is sub-contractors having problems collecting their retainage. I’ve written before about the legal timing requirements for notices and perfecting a claim, today I want to spend some time discussing some of the practical aspects of collecting what is due.

The Texas Property Code §53.101 requires owners to retain ten percent of the contract price or value of the work completed. According to the Property Code, this is done to secure payments owed to subcontractors, suppliers, providers of specially fabricated material, etc. The Property Code does not require the main contractor to hold back retainage from their sub-contractors, but they frequently do. Why? Because they can—and because holding back retainage does wonders for the main contractor’s cash flow during the project, plus it provides a buffer in the event of charge backs from the owner for non-conforming work. Sub-contractors, especially those who complete their work early in the project, bear the burden of this payment structure. They have to suffer the impact on their cash flow waiting for project completion, keep up with statutory notices, bear the risk that all notices have been completed correctly, and that there will be money at the end of the project for all.
When it comes to non-payment or slow payment of retainage, there is no doubt that sometimes those funds are held back for legitimate reasons. But other times it appears GCs may be trying to make up for under bid contracts, their own mistakes, or they are just un-scrupulous and are trying to keep money on the back end that some sub-contractors are not willing to expend the time or money to collect. But if you had a million dollar contract, $100,000 isn’t anything to just let go—especially since that “back end” money is where the sub-contractor often finds his profit. Even if you have provided all the statutory notices to support your claim, you might still face resistance.

Most contractors get in the business to actually build things, but to be successful one strong trait you must have to collect all the money owed to you is to be very good with paperwork. This is especially true when it comes to protecting your claim for retainage. You want to build things—but not for free.

Few enjoy the paperwork side of a job. It can be complicated, and it is certainly time consuming. If everything goes well on a project, it may seem like a waste of time. But remember that documentation is for those times that the project doesn’t go well—which is almost impossible to predict. Even if your portion of a project goes better than expected, when it comes time to collect retainage, your claim will be resolved at the same time as everyone else. That might make collection difficult if there were cost overruns or problems on other aspects of the job.
What do we typically see that GC’s and Contractors use to keep from paying you your retainage?

Delays. Ever worked on a project with delays? Keep a calendar log of every day on the job, what happened, progress made, problems encountered etc. If there is a delay note how long, why it occurred and who is responsible. One reason frequently given for holding back retainage are chargebacks due to “delays.” Your calendar log will help defend your claim if you are being blamed when it comes time to collect your retainage. You won’t be able to rely on your memory alone to recall what happened on a particular Wednesday afternoon six months ago. If you were not the responsible party your documentation will help you recall if there really was a delay as claimed and provide proof that it wasn’t you.

“Man the Job” Notice. Ever received one of these? What did you do? Recognize that sometimes these are sent to justify non-payment of retainage at the end of the project. Don’t just show back up and ignore formal response to the letter. A calm, professional response is required to any letter you receive with an explanation as to what has occurred and what is required to be able to move forward with the work. This is true even if the problem is solved by the time the response is made—in that case document what the problem was, and the solution that was reached.

Change orders, back charges, scope of work. No matter how much planning is done at the outset of a project, changes are almost inevitable once actual construction starts. Proper documentation is important from the beginning. When you first receive the scope of work you should verify the scope, make sure it is specific, and if there is anything that is not included, then make sure it is specifically excluded within the contract terms. Properly documented change orders establish what was expected under the contract, what the change is, as well as the adjustments to payment and retainage. When it comes time to collect retainage, relying on a handshake agreement to changes on the job won’t hold up. The person you dealt with day to day on the Project may have little, if any, input into releasing retained funds. Also, what if that person is no longer with the company? Correctly documented change orders can be linked to the scope of work if it was not included in the original contract and help you provide proof of the amount owed to you.

You worked hard on the Project, you take pride in your work and you should be fairly paid. Don’t take short cuts on the paperwork. Such shortcuts may turn into cutting you short on your bottom line!

Payment Bond Claims – Part 2

Last month I started a series about the Payment Bond Process in Texas.  You can find the last article here:  Payment Bond Claims – Part 1.   We went over the time frames of notices and what has to be included.  This time I would like to go over what kind of items you can include in a Bond Claim.

One item that can be included is labor.  Chapter 2253.001 (5) of the Statute says: “Public work labor” means labor used directly to carry out a public work.  That’s pretty self-explanatory, but of course people have tried to get paid on aspects that pertain to labor but may not be direct labor.

The following situations have been tested in the courts and have been deemed covered by the bond:   1) Labor paid out on a commission basis qualifies; and 2) where labor is furnished by a temp agency then the temp agency qualifies to make a claim on the bond.

The following examples are a few scenarios that have been deemed not covered by the bond;  1) Plans that were provided but were never used on the construction project; 2) Insurance premiums that are normally held, such as workers compensation and liability coverage; 3)and, of course, funds.

Another item that can be included is materials. Chapter 2253.001 (6) of the Statute says:

“Public work material” means:

(A)  material used, or ordered and delivered for use, directly to carry out a public work;

(B)  specially fabricated material;

(C)  reasonable rental and actual running repair costs for construction equipment used, or reasonably required and delivered for use, directly to carry out work at the project site;  or

(D)  power, water, fuel, and lubricants used, or ordered and delivered for use, directly to carry out a public work.

Like the items I discussed above in labor, the courts have distinguished between materials that may or may not qualify and the following has been held up through the courts.  Materials that the courts have found to qualify include items that might be rented or leased for a job but are off-site, such as a rock crusher located at a quarry that could not be moved to the actual jobsite.  One can also claim a leased piece of equipment that will be used exclusively for a specific job and then returned when the job is complete.    However, the courts have stated that materials that might be purchased and used in the normal course of business for a construction business are not allowed to be claimed.

Next time I will try and cover some other situations that have been litigated through the courts.

Payment Bond Claims – Part 1

Over the next few posts I would like to go over payment bond claims for state and local public works projects.  You may have heard these described as Little Miller Act claims, or what was known as the McGregor Act.  In Texas the process is controlled under Chapter 2253 of the Texas Government Code.  Although it may appear that the primary purpose behind Chapter 2253 is to make sure contractors get paid for public works projects, it is also intended to protect the bond companies from being overwhelmed with claims.

The deadlines are set forth in the code in such a way that it puts the burden on the contractor to know them and follow them, or they will lose out on their claim.  On the flip side, if you are willing to do what is required by the law you have a good chance of getting the money that is owed to you.

First, we must review the timing of notifications.  The Texas courts have held up these deadlines and requirements, so they are very important to follow.

Second tier contractors that have a written agreement, must give written notice (sent by certified or registered mail) to the prime contractor and the surety.  The notice must be mailed on or before the 15th day of the third month after each month in which any of the claimed labor was performed or any of the claimed material was delivered.  The notice must be accompanied by a sworn statement of account that states in substance: (1) the amount claimed is just and correct; and (2) all just and lawful offsets, payments, and credits known to the affiant have been allowed.  The statement of account shall include the amount of any retainage applicable to the account that has not become due yet.

If there is no written agreement then these items must also be included in the notice: (1) the name of the party for whom the public work labor was performed or to whom the public work material was delivered; (2) the approximate date of performance or delivery; (3) a description of the public work labor or material for reasonable identification; and (4) the amount due.  The payment bond beneficiary must generally itemize the claim and include with it copies of documents, invoices, or orders that reasonably identify: (1) the public work labor performed or public work material delivered for which the claim is made; (2) the job; and (3) the destination of delivery.

Lower tier contractors have to follow the above rules for the third month notice but have one additional notice they need to provide.  This notice must be mailed to the prime contractor on or before the 15th day of the second month after each month in which the labor was performed or the material was delivered.

Retainage claims can be included in the above notices or by sending a separate retainage claim to the Prime contractor and surety on or before the 90th day after the final completion of the project.  The claim requires a notice to contain a statement of: (1) the amount of the contract; (2)  any amount paid;  and (3)  the outstanding balance.

A little leeway is given in the code for notice if the end of a notice period ends on a weekend, i.e. the 15th is on a Saturday, the notice is due on the next following non-holiday weekday.

Next time I’ll go over what can and can’t be included in a payment bond claim.

Law Changes: Lien Waivers and Retainage Notices

In addition to the new indemnification laws that we discussed during the last blog post, there are other laws and bills that were passed that greatly affect the construction industry.  One of them is HB 1456 the other is HB 1390 you can find the full text of the new laws here: TX HB 1456 and TX HB 1390.

HB 1456 Goes into effect January 1st and pertains to Lien waivers.  You may recall it was just a few months ago I went over some of the pit falls of lien waivers in the blog post Lien Releases: Look Before You Leap.  Well HB 1456 changes how lien waivers are handled.  It provides standard forms for conditional and unconditional lien waivers.  It also fixes something that has plagued the building industry, trying to force sub-contractors to sign an unconditional waiver before payment has been made in full for the invoice or work in question.

Here is the text from the law that fixes that issue:

“A person may not require a claimant or potential claimant
to execute an unconditional waiver and release for a progress
payment or final payment amount unless the claimant or potential
claimant received payment in that amount in good and sufficient
funds.”

One other item the new law provides are conditional and unconditional waiver forms that must be substantially complied withto be valid.

The law that arose from  HB 1390 pertains to how retainage notices were to be handled since September 1, 2011.  Back in 2009 (view it here: retainage claims) I wrote about when Retainage notices are due.  HB 1390 now allows the notices to be given at the end of the project instead of requiring the contractors and/or subcontractors to give Retainage Notices at the beginning of the project.  This is important because I very rarely saw the retainage notices being timely sent, if at all.

I am VERY excited about the changes in these laws.  These go so far in protecting the Texas Contractors and takes care of many of these issues that have come up in my legal practice almost daily in the past few years.  Again, the lawmakers have gone a long way to strengthen some of the loopholes that have been used time and time again by the unsavory.