Withholding, or “holding” as it is sometimes called, is a financial quirk found only in the construction industry that causes unnecessary financial hardship for any party it is placed on: general contractors, subcontractors, sub-subcontractors, etc. The reason behind withholding an amount of money from a contractor until he finishes his job, and only then paying all the money that is owed, may sound like a good way to ensure the result you want, but the facts just don’t bear it out. . argument out The ironic and sad thing about retention is that it often has exactly the opposite effect.
Few subcontractors feel that retention is what keeps them coming back to complete a job. The reason is that many contractors wait months or even years to receive the balance owed to them, whether they have completed their part of the work two months or 10 months after the start of the project. In other words, many contractors do not get paid the withholding they are owed, even if they have completed their work and it was done correctly. They get paid much later. Holding back provides little, if any, incentive to complete the job. Worse yet, withholding can cause serious cash flow problems for contractors who need the 5, 10, or 15 percent that they are owed to pay their employees and vendors. In fact, subcontractors say that, on average, they could discount their prices by 3 percent if they didn’t have to worry about fighting to get withholding.
In other words, the lien, as it exists in the construction industry, (a) does not function as a guarantee to owners, general contractors, or subcontractors; and (b) decreases the efficient operation of the contractor by unnecessarily tying up capital.
Does it sound exaggerated? Try to think of withholding this way: Imagine how your dentist would react if you were told, before an appointment, that you don’t plan to pay the full amount of the bill until you are satisfied that the dental work is “defective.” for free.” That kind of policy just wouldn’t work. Dental patients don’t withhold part of their payments as a way to hold the dentist liable; the law or insurance protects them. Dentists wouldn’t accept a deal that would tie up their money indefinitely in the accounts. Patient bank accounts Dentists want to spend the money on equipment or salaries.
The position of contractors is not much different. The law and bonds protect owners and prime contractors when a contract specifies what work their subcontractors will perform and when. However, in the construction industry, the practice of having the client withhold funds until the work is determined to be “free from defects” works exactly as described in the dentist example. The only difference is that the “dentist” is a subcontractor or prime contractor and the “patient” is a prime contractor or owner, respectively. Unlike concerned dental patients, however, many main contractors and owners show up to their “appointments” expecting the subcontractors or main contractors to get the job done with a smile.
There are alternatives to withholding. Many subcontractors are willing to provide performance bonds or bonds to guarantee their work, adding to the legal protections owners and prime contractors have under the law. These vehicles, unlike retention, provide real security without hurting contractors financially.
