Tennessee retainage law: a plain-English guide for contractors

What is retainage in construction?

Retainage (also called retention) is the part of each progress payment the owner holds back until the work is finished. The general contractor usually passes the same percentage down to its subcontractors, so everyone in the chain has money held back.

"5% retainage" means that on a $200,000 pay application, $10,000 is withheld and $190,000 is paid. Over a long job the held amount adds up: on a $4 million subcontract at 5%, $200,000 is sitting with someone else by the end of the work. On your books it's a retainage receivable. On the GC's or owner's books it's retainage payable.

Retainage exists to give the owner leverage to get the work finished and to protect against unpaid subcontractors and suppliers filing liens. It also means contractors finance part of the project with their own earned money, often for a year or more.

The 5% retainage cap in Tennessee

Tennessee caps retainage at 5 percent of the contract, on both private and public projects. Tenn. Code Ann. § 66-34-103(a) says retainage "may not exceed five percent (5%) of the amount of the contract." The same cap applies between owner and prime contractor (§ 66-34-203) and between prime contractor and subcontractor (§ 66-34-303).

Retainage is allowed, not required, and the statute has no step-down schedule. The rules sit in Tennessee's Prompt Pay Act (Title 66, Chapter 34), which does not apply to residences of one to four single-family units (§ 66-34-702).

The mandatory retainage escrow account

Tennessee is one of the few states that requires retainage to be held in escrow. Under § 66-34-104, when the prime contract is $500,000 or more, retainage withheld on that contract and on every subcontract under it must go into "a separate, interest-bearing, escrow account with a third party," set up when retainage is first withheld.

• It's the contractor's money. From the moment it's withheld, the retainage is the sole and separate property of the contractor it's owed to, subject to the withholder's rights if that contractor defaults.
• Written notice on every pay app. Each time retainage is withheld, the party withholding it must give written notice of the bank name, the account number and the amount deposited.
• It can't be waived. The statute says compliance "is mandatory, and shall not be waived by contract."
• No double escrow. If retainage is already escrowed for the benefit of the prime and its subs, lower tiers don't have to escrow the same funds again (§ 66-34-103(d)).

Penalties for not escrowing retainage

• $300 a day. A party that fails to escrow owes $300 per day "as damages, not as a penalty" to the contractor the funds belong to, from the date retainage was first withheld until it's escrowed or paid (§ 66-34-104(c)).
• A crime after written notice. Failing to escrow within 7 days of written notice of the failure is a Class A misdemeanor (§ 66-34-104(j)).
• Fines that stack daily. Violating the 5% cap, the release deadline or the escrow duty can bring a fine of up to $3,000, with each day a separate violation, plus restitution to the contractor (§ 66-34-103(e)).

The Tennessee Supreme Court enforced the daily damages in Snake Steel, Inc. v. Holladay Construction Group (2021) against a general contractor that never escrowed, even though the retainage was later paid. State agencies, counties, cities, school boards and other public bodies are exempt from the daily damages and criminal penalties.

How long can retainage be held in Tennessee?

Who pays whom: Deadline

Owner to prime contractor: Within 90 days after completion of the work or substantial completion of the project, whichever comes first (§ 66-34-103(b))

Prime contractor to subcontractor: Within 10 days after receiving it

Each lower tier: Within 10 days after receiving it

A separate section, § 66-34-204, also starts the 90 days from an occupancy permit, a certificate of substantial completion, or the owner's use of the project, less any amount the owner may reasonably withhold under the written contract. Courts have split since a 2020 amendment on how far a contract can stretch that deadline, so if your retainage is held past 90 days, get advice.

Who gets the interest on Tennessee retainage?

The contractor does. When the work is complete and a written release is given, "all funds accumulated in the escrow account together with all interest" are paid immediately to the contractor they're owed to (§ 66-34-104(e)).

Late payments, including late retainage, accrue interest at the contract rate, or 1.5 percent per month if the contract sets none (§ 66-34-601). Under the Prompt Pay Act the owner pays the prime within 30 days of a timely pay application, and the prime pays subs within 30 days, subject to any pay-if-paid clause.

The money involved is real. $500,000 of retainage held for 18 months earns about $28,500 at 3.7% compounded monthly. Where nothing requires an escrow account, that interest usually stays with whoever holds the money.

Retainage escrow for Tennessee projects

Tennessee already requires the escrow account on jobs of $500,000 or more. Retain-Edge is built to run it: a segregated escrow account at a partner bank, a balance for every contractor, the deposit notices on every pay app, and the interest paid to the GCs and subcontractors who earned it. Retain-Edge never holds, lends or invests the funds, and is now enrolling pilot projects.

Get early accessCalculate your interest

Public projects in Tennessee

The 5% cap and the 90-day release apply to public owners too. State agencies, counties, cities, school boards and other public bodies are exempt from the $300-a-day damages, the escrow notice duty and the criminal penalties.

On public contracts, § 12-4-108 lets a contractor withdraw retainage by depositing approved securities instead: U.S. Treasury obligations, Tennessee general obligation bonds, or certificates of deposit or letters of credit from Tennessee institutions. The contractor keeps the interest on the securities while it isn't in default.

How to get retainage released faster

1. Read the retainage clause before you sign. Look for the percentage, whether release is by scope or only at final completion, and what documents release requires.
2. Check the escrow notice on every pay app. On a prime contract of $500,000 or more, you should get written notice of the bank, account number and amount each time retainage is withheld. If you don't, ask for it in writing.
3. Build the closeout package as you go. Collect warranties, O&M manuals, as-builts and certifications with your monthly pay apps instead of chasing them at the end.
4. Calendar the 90 days. Note the date of substantial completion, the occupancy permit or the owner's first use, and follow up in writing as the 90 days run.
5. Ask for scope-level release. If your scope is finished, ask for your retainage to be released when your scope clears, not when the last trade finishes. Many contracts allow it.

Tennessee retainage FAQ

What is the maximum retainage in Tennessee?+

Five percent of the contract amount, on both public and private projects (Tenn. Code Ann. § 66-34-103(a)).

Does Tennessee require retainage to be held in escrow?+

Yes, when the prime contract is $500,000 or more. Retainage on that contract and its subcontracts must go into a separate, interest-bearing escrow account with a third party, set up when retainage is first withheld (§ 66-34-104).

Who gets the interest on escrowed retainage in Tennessee?+

The contractor or subcontractor the retainage is owed to. At completion, the funds and all interest are paid to them.

Can a contract waive the Tennessee escrow requirement?+

No. The statute says compliance is mandatory and shall not be waived by contract.

What happens if retainage isn't escrowed in Tennessee?+

$300 per day in damages from the date retainage was first withheld. Failing to escrow within 7 days of written notice is also a Class A misdemeanor. Public owners are exempt from these remedies.

When must retainage be released in Tennessee?+

Within 90 days after completion of the work or substantial completion of the project, whichever comes first. The prime must pay subcontractors within 10 days of receiving it.

What interest applies to late payments in Tennessee?+

The contract rate, or 1.5 percent per month if the contract sets none (§ 66-34-601).

Does the Tennessee Prompt Pay Act cover home building?+

No. Residences of one to four single-family units are excluded (§ 66-34-702).

Retainage guides for other states

California5% cap · 2%/mo late penaltyConnecticut5% cap · mandatory escrowFlorida5% public cap · 2%/mo lateGeorgia5% public cap · 10-day flow-downKentucky10%/5% caps · escrow at $2M+LouisianaEscrow at $50K+ · 10%/5% publicNew York5% cap · void above itNorth Carolina5% public cap · 50% stopOregon5% cap · retainage bondsTexas10% reserve · public caps