Texas 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. On most jobs it is 5 to 10 percent of every pay application. The general contractor usually passes the same percentage down to its subcontractors, so everyone in the chain has money held back.

"10% retainage" means that on a $200,000 pay application, $20,000 is withheld and $180,000 is paid. Over a long job the held amount adds up: on a $4 million subcontract at 10%, $400,000 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.

Private projects in Texas: statutory and contractual retainage

On private work in Texas there are two different things people call retainage, and they follow different rules.

Statutory retainage (the 10% rule)

Under the Texas Property Code, Section 53.101, the owner must reserve 10 percent of the contract price (or 10 percent of the value of the work done) while the work is in progress and for 30 days after the work under the original contract is completed. Since the 2022 changes to the lien law, the statute calls these "reserved funds."

The reserved funds secure payment to the subcontractors and suppliers who perfect a claim against them. If an owner fails to reserve the funds, claimants who follow the statute can have a lien on the property to the extent of what should have been reserved (Section 53.105). That is why careful owners and lenders hold the full 10 percent until 30 days after completion.

Contractual retainage

Contractual retainage is whatever percentage the contract says, withheld under the contract's own terms. It is separate from the statutory reserve, and its release is governed by the contract. GCs usually withhold the same percentage from subcontractors that the owner withholds from them.

If you're a subcontractor or supplier with contractual retainage held, protect your lien rights with the notice of claim for unpaid retainage (Section 53.057). It generally has to be sent no later than 30 days after your contract is completed, terminated or abandoned, or 30 days after the original contract is terminated or abandoned if that is earlier. Miss it and you can lose the lien rights that back up your retainage.

2022 changes to the Texas lien law

For original contracts entered into on or after January 1, 2022, House Bill 2237 rewrote much of Chapter 53. It introduced statutory notice forms, gave every tier of subcontractor and supplier the same notice deadlines, allowed notices by any traceable delivery service, and extends deadlines that fall on a weekend or legal holiday to the next business day. Older contracts still follow the old rules.

Prompt payment on private work

The Texas Prompt Payment Act (Property Code Chapter 28) requires the owner to pay a contractor's properly submitted payment request within 35 days, and the contractor to pay its subcontractors within 7 days of receiving the owner's payment. Overdue amounts bear interest of 1.5 percent per month. Payments can be withheld for a good-faith dispute, within limits.

Public projects in Texas: Government Code Chapter 2252

Retainage on Texas public works is governed by Government Code Section 2252.032. The rules apply to public works contracts of $400,000 or more with the state, counties, cities, school districts and other public entities. Texas Department of Transportation contracts under Transportation Code Chapter 223 are excluded.

Contract value: Maximum retainage

Under $5 million: 10%

$5 million or more: 5%

Dam construction (any value): 10%

• No more from subs than from the GC. A prime contractor may not withhold a greater percentage of retainage from a subcontractor than the public entity may withhold from the prime.
• No retainage after completion. The entity may not keep withholding retainage after the prime contractor completes the work, including during the warranty period. The exceptions are a bona fide dispute over work that doesn't comply with the contract, or a surety on an outstanding bond that doesn't agree to release.
• Release terms in the contract. Every public works contract must say when the project is substantially complete and when retainage may be released. The entity must keep an accurate record of retainage withheld and released.
• Interest-bearing accounts. On competitively awarded contracts of $10 million or more, the public entity and the prime contractor may agree to deposit retainage in an interest-bearing account. It is optional, so ask for it.

The 5 percent cap on contracts of $5 million or more and the ban on holding retainage through the warranty period came from House Bill 692, effective June 15, 2021.

How long can retainage be held in Texas?

Type of work: How long it can be held

Private, statutory (reserved funds): During the work and for 30 days after the original contract is completed

Private, contractual: What the contract says, usually until final completion and closeout

Public works ($400,000+): Not after the prime contractor completes the work, including the warranty period, except for a bona fide dispute or surety objection

In practice the wait is usually longer than the statute suggests. Release depends on final completion, punch lists, lien waivers, warranties, as-builts and O&M manuals, and a subcontractor who finished early in the job can wait for the whole project to close out. Subcontractors in the early trades, like sitework, concrete and steel, often wait the longest.

Does retainage earn interest in Texas?

Usually not for the contractor. Texas doesn't require private owners to put retainage in a separate or interest-bearing account, so on most jobs it simply stays in the owner's operating cash, and any earnings on it belong to the owner. On public work, an interest-bearing account is only an option on competitively awarded contracts of $10 million or more.

Some states go further. Tennessee and Kentucky, for example, require retainage on covered projects to be held in a separate interest-bearing escrow account, with the interest going to the contractor.

The money involved is real. $500,000 of retainage held for 18 months earns about $28,500 at 3.7% compounded monthly. Without an escrow account, that interest stays with the owner.

A retainage escrow account for Texas projects

Retain-Edge puts retainage in a segregated escrow account at a partner bank and pays the interest to the GCs and subcontractors who earned it, pro rata, on their own balances. The owner withholds exactly what the contract already allows. The only extra step for the project team is to CC payapp@retain.capital on pay app submissions, discussions and approvals. Retain-Edge doesn’t hold, lend or invest the funds.

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How to get retainage released faster

1. Read the retainage clause before you sign. Look for the percentage, whether it drops to 5% at 50% completion, whether release is by scope or only at final completion, and what documents release requires.
2. Calendar your notice deadlines. On private work, the notice of claim for unpaid retainage and the lien affidavit deadlines run from completion, termination or abandonment. Missing one can cost you your security for the retainage.
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. Use the Texas statutory lien waiver forms. Texas requires specific conditional and unconditional waiver forms for progress and final payments (Property Code Section 53.284). A waiver on the wrong form causes delays.
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.
6. On public jobs, know the rules. Retainage can't be held through the warranty period, and your GC can't hold a higher percentage from you than the entity holds from the GC.

Texas retainage FAQ

What is retainage?+

Retainage is the portion of each progress payment, usually 5 to 10 percent, that an owner or general contractor withholds until the work is complete. It secures completion of the work and payment of subcontractors and suppliers.

Is retainage required in Texas?+

On private projects where mechanic's liens can be claimed, Texas Property Code Section 53.101 requires the owner to reserve 10 percent of the contract price, or of the value of the work done, during the work and for 30 days after completion. On public works, retainage is allowed but capped by Government Code Section 2252.032.

How long can retainage be held in Texas?+

On private work, the statutory reserve is held during the work and for 30 days after the original contract is completed. Contractual retainage follows the contract. On public works of $400,000 or more, retainage may not be withheld after the prime contractor completes the work, including during the warranty period, except for a bona fide dispute or when the surety does not agree to release.

What is the maximum retainage on Texas public projects?+

10 percent on contracts under $5 million and 5 percent on contracts of $5 million or more. Dam construction contracts may be held at up to 10 percent regardless of value.

Can a general contractor hold more retainage from a sub than the owner holds?+

On Texas public works, no. A prime contractor may not withhold a greater percentage from a subcontractor than the public entity may withhold from the prime. On private work, the subcontract governs.

Does retainage earn interest in Texas?+

Not by default. Texas doesn't require private owners to hold retainage in an interest-bearing account. On public contracts of $10 million or more that were competitively awarded, the entity and prime contractor may agree to an interest-bearing account. A retainage escrow account set up by contract lets the contractors earn the interest instead.

What is a retainage escrow account?+

A separate bank account that holds the retainage withheld on a project instead of leaving it in the owner's operating cash. The funds stay segregated, interest accrues on them, and they are released when the contract's release conditions are met.

What is the difference between retainage and retention?+

None in practice. Retainage is the usual term in the United States. Retention or retention money is more common in the UK, Canada and Australia.

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 bondsTennessee5% cap · escrow at $500K+