Monthly Archives: February 2017

Understanding Retainage

While the concept is no mystery to those who participate in the construction industry. The means by which you protect these job related accounts receivables can be a little tricky.

Lets take a look at Texas.

Texas statutes actually require that the property owner hold 10% retainage from the total due the Original Contractor until the project has completed, and 30 days have elapsed. Why? Why does the State make this requirement upon the Property Owner? There may be several answers to this question. But the one that jumps out is: “To help defend against mechanics liens which those, other then the original contractor, are preparing to bring against the project due to unpaid contracts”.

By requiring the Property Owner to hold back (RETAIN) 10% of the amount due the Original Contractor for up to 30 days after the job is completed. Those with unpaid contracts can properly notice the property owner while funds are still available to satisfy these claims and protect the property owner from possibly paying twice for the materials, supplies or labor which was provided to the project under subcontracts.

Now the key to protecting all of your unpaid balances for this project is to have a crystal clear understanding as to what is retainage and what is not!

Best way to explain is by illustration:

Lets say that you are the Plumbing Contractor for an improvement being made to Texas Corporate Park. You have subcontracted with the Original Contractor to install all of the plumbing fixtures for a total price of $650,000.00. You agree to a Retainage Agreement of 10%.

So from the very beginning of the project you know that $65,000.00 of the total due to you are not collectable until the TERMS of the RETAINAGE AGREEMENT has been satisfied. Lets also say that your work of this job will last 5 months and that you actually finish on time. To sweeten this illustration, you have 100% approval of your work by the Original Contractor and the Owner. I know, sounds like utopia. Bear with me for this illustration. Your contract of $650,000.00 should be paid in full. However, you agreed to allow 10% ($65,000.00) be subject to the retainage agreement. Your subcontract also most likely included terms for you to submit invoices as you completed select portions of your contract. Those invoices cannot total more than $585,000.00 and are due and payable to you during the course of the contract in accordance with your agreed terms.

To protect the $585,000.00 (amount of subcontract less retainage) you must submit all first and second notices of unpaid balances as they become due during the 5 month project, in order to secure your right to file a mechanics lien for unpaid balances. If you were 100% in compliance with the Texas notice of unpaid balances requirements, and unpaid balances which represent $75,000.00 of the $585,000.00 are owed to you.   An affidavit of lien for $75,000.00 may be claimed. If your affidavit of lien is being claimed at a time which is also in agreement with the terms for retainage, and the retainage of $65,000.00 is also unpaid,  you may file a single affidavit of lien for $140,000.00.

However, should the terms of the retainage agreement allow additional time for disbursement of the $65,000.00 you allowed to be withheld as retainage, you must limit your affidavit of lien to the $75,000.00 unpaid balances portion and consider an additional affivdait of lien for the retainage portion once the retainage agreement has matured and you have not been paid the $65,000.00 Retainage.

So the lessons to consider from this illustration are:

  1. Avoid mixing unpaid balances with retainage (Unless all amounts are due or past due)
  2. Make sure that you have complied with ALL Texas notices for retainage and unpaid balances. (Most will get the unpaid balance portion under control. It is the retainage protection which tends to get lost in the paperwork)
  3. Using a professional lien service, with years of experience with Texas notices, should greatly reduce the worry and keep all of your unpaid job related accounts receivable in compliance with the requirements that allow you to seek protection under the statutes.

Contact CRM for all of your notices in all 50 states.

Are you protected by the Lien Laws? – part four

 

Once you have wrapped your mind around the first three parts of this series on mechanics liens, it will be time to bring it down to the primary concern:

“How Much” may I claim in my lien?

The short answer is: “The amount which remains past due from your client, on the project referenced in the mechanics lien.” Now this is quite simple, and should be your focus if you want to make certain the amount being claimed in your mechanics lien is unchallenged, when it is presented to a Judge. However, most who have gone this far in the collections process, are concerned about recovering the cost they have incurred above and beyond that which remains unpaid. Things like late fees, document fees, filing fees, courier, recording, the list goes on. How can I get re-imbursed for all of these added cost to collect the money that was due to me in the first place?

The natural reaction is to add all of these cost to the mechanics lien. Granted that the owner is ultimately responsible for satisfying a mechanics lien which is litigated in your favor. However, it may not be his responsibility to repay all of your residual costs.

To be on the safe side, take the path which will afford you the greatest degree of success.

  • First and foremost, go after the owner for the amount which is unquestionably supported by the lien laws. By claiming only this amount you significantly improve your opportunity to be successful in court.
  • Second, make sure your attorney is aware of all of the cost you have incurred and insist that he ask the Judge to award these in addition to the amount claimed in the mechanics lien.

Yes, you did absorb many unexpected expenses to advance your mechanic lien to this stage. However, making the mistake of not understanding how the mechanics lien laws work and adding these expenses to the amount of the lien, may result with a discharged lien and no legal right to refile your claim. This means you loose all the benefits you initially secured by seeking the protection of the mechanics lien laws.

To play it safe you should consider:

  1. File a proper mechanics lien for the amount you may legally claim.
  2. You may also file a breach of contract action against your customer who originally agreed to pay you for the materials or services you provided. (It is not your fault the job went bad. You may not collect twice for the lien. However, you may win a judgement for ancillary cost from the party who inadvertently caused you to select a mechanics lien as a means of collecting this unpaid balance.)
  3. Make sure that the signed contract or sales agreement, you enter into with your customer, has a clause that will allow you to seek payment for all and any collections expenses you may incur to collect the amounts due.

Now that you have an understanding as to how to be on the safe side of the mechanics lien process, we invite you to always start with a throughly researched preliminary notice. Choosing CRM Lien Services, Inc. to be your notice preparation service is one sure way to make this process affordable and effective.

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