Paying contractors safely: progress payments, retainage and lien waivers

Why 'what percent have you paid?' comes before 'how late is it?'

In the thread General Contractor taking too long?, a Houston owner describes a job that is roughly 90% finished and months past a completion date the contract made 'of the essence.' One of the first things commenters ask is how much of the contract price has already been paid. The thread is about delay, not lien law, so its support here is indirect. But the question is the right one. If you have paid 95% of the price for 90% of the work, the contractor has little financial reason to come back and finish, and you have little money left to hire someone else to do it.

A different post, I traded lines of customers for construction deadlines, comes from a former multi-unit operator who became a general contractor. It stresses preconstruction planning and resequencing work when hidden conditions turn up. It does not discuss lien waivers. We cite it only as a reminder that a contractor's cash flow and payroll pressure are real. A payment system that pays promptly for verified work protects both sides, and it works better than one that pays early or holds back at random.

Build a schedule of values you can check on site

A schedule of values (SOV) breaks the contract price into line items, and each pay application reports percent complete against those lines. It is the foundation of everything else. If the SOV has five lines and one of them is 'Kitchen: $180,000,' nobody can tell whether 40% of the kitchen is done. If it separates rough plumbing, the grease interceptor, gas piping, the hood and duct, make-up air, the walk-in and final connections, a walk-through can confirm or dispute each line.

Watch for front-loading. That means inflating early lines such as mobilization, demolition or general conditions and shrinking late lines such as finishes and closeout. It lets a contractor collect more money early than the work justifies. Ask for general conditions to be billed in proportion to elapsed contract time, and give closeout its own line: punch list, as-built drawings, manuals, training and warranty documents. A separate closeout line keeps real money attached to the paperwork you will need after opening.

• One line per trade scope, and separate lines for major equipment (hood, walk-in, interceptor) between purchase and installation
• General conditions billed in proportion to elapsed contract time
• A distinct closeout line covering punch list, as-builts, manuals, warranties and training
• Approved change orders added as new numbered lines, never folded into existing ones

Reviewing a pay application against the work, not the calendar

A pay application should arrive a set number of days before payment is due, so someone can walk the site with it. That person might be the architect, an owner's representative or the owner. For each line, compare the claimed percentage with what is physically installed. Photograph anything disputed with a date and location. Rough-in inspected and approved is a stronger completion marker than rough-in 'mostly done.' Where the permit record shows a passed inspection, note it on the review sheet.

Certify each line at the percentage you can support and explain every reduction in writing. A short note such as 'interceptor not set; plumbing certified at 55% rather than 75%' keeps the discussion factual. It also gives the contractor a clear path to bill the difference next month. If your contract names the architect as the certifier, follow that process. An owner who quietly pays a different amount than the architect certified creates a separate dispute.

Deposits, long-lead equipment and stored materials

Restaurant jobs often need large payments before anything is installed. Hood systems, walk-in boxes and some refrigeration are made to order, and vendors may require deposits. That is legitimate, but it is exactly where owners end up paying ahead of progress. Decide in the contract what documents release money for equipment that is not yet on site: a vendor invoice and order acknowledgment, proof the GC actually paid the deposit, a bill of sale or other title documentation where obtainable, insurance covering stored items, and identification of the goods at a bonded warehouse or the vendor's facility.

An upfront 'mobilization deposit' that is not tied to a specific purchase should be small and should be credited against early SOV lines. If a bidder insists on a large unallocated deposit, ask what it pays for. Sometimes the answer is reasonable, such as a specific equipment order. Sometimes it means the contractor is financing other jobs with your money.

Retainage: what it protects and when it should come back

Retainage is a percentage withheld from each progress payment and released at substantial or final completion. It gives you leverage over the punch list and closeout documents, and a cushion if a defect appears late. The percentage is a contract term, not a universal number. Some states and public-project rules cap retainage or require its release by a certain point, and some contracts reduce retainage once the job reaches a midpoint. Do not copy a percentage from a template or a forum. Ask a construction attorney in the property's jurisdiction what is permitted and customary.

Define the release conditions in writing: substantial completion confirmed, punch list complete or valued, closeout documents delivered, unconditional waivers for all earlier payments received, and conditional final waivers exchanged with the final payment. Unconditional final waivers follow once the final funds have cleared. Retainage that is held without stated conditions tends to become an argument rather than an incentive. Our related article on punch lists covers how to tie the final release to specific closeout items.

Conditional and unconditional lien waivers, and who signs them

In many US jurisdictions, contractors, subcontractors and suppliers who improve a property can claim a mechanic's lien if they are not paid. A sub who was never paid by your GC may be able to file even though you paid the GC in full. Lien waivers are the paper trail against that risk. A conditional waiver says the signer gives up lien rights for a stated amount once that payment actually clears. An unconditional waiver says the payment has already been received. The usual rhythm is to collect a conditional waiver with each new payment and an unconditional waiver for the payment made last cycle.

Collect waivers from the general contractor and from every subcontractor and material supplier above a threshold you set, typically through the GC. Ask the GC for a sub and supplier list at the start so you know whose waivers to expect. In a leased space, also read the lease. Many leases require the tenant to remove or bond off any lien filed against the landlord's property within a set period, which can turn a GC's unpaid sub into your default under the lease. Some states prescribe exact statutory waiver forms, and a waiver that does not follow the required form may not be effective there. Whether your state does, and what the deadlines are, is a question for local counsel.

Watch for signs that a waiver may not be genuine. These include a waiver for a sub you never saw on site, a missing waiver from a sub who clearly worked there, signatures that look copied between months, or amounts that do not match the GC's own breakdown. Respond by verifying, not by accusing. Call the sub's office using a number you found independently, confirm the amount received, and ask the GC to explain any discrepancy in writing. Joint checks payable to the GC and a specific sub are another tool where a sub reports non-payment, if your contract allows them.

Hypothetical worked example: pay application #3

Every figure here is hypothetical. A $400,000 tenant buildout has nine SOV lines and 10% contractual retainage. Eight weeks into a 20-week schedule, pay application #3 claims cumulative work of $192,800, or 48.2%. After a site walk, the owner's representative certifies $136,600, or 34.15%. The differences: general conditions are cut to 40% because 8 of 20 weeks have elapsed. Plumbing is cut to 55% because the interceptor is not set. Framing is cut to 70%. A tile delivery claimed under finishes is not installed. On the hood line, the GC claimed $48,000 (50%), but only the roof curb and duct rough-in are in place, worth 15%, or $14,400. The GC paid the hood vendor a $30,000 fabrication deposit. That deposit is held until the stored-material documents the contract requires arrive.

Payment math: certified $136,600 minus 10% retainage ($13,660) gives $122,940 earned to date, net of retainage. Payments 1 and 2 totaled $98,000, so this payment is $122,940 minus $98,000, or $24,940. Paying the claim as submitted would have been $192,800 minus $19,280 retainage, or $173,520, minus $98,000, which is $75,520. If the owner had paid that, total payments would have reached $173,520, or 43.4% of the contract, for $136,600 of verified work. Payments would have run $36,920 ahead of the work in place. If the hood paperwork arrives before the next payment date, the deposit adds $30,000 less $3,000 retainage. That is $27,000, bringing the payment to $51,940.

A payment-release checklist for each cycle

Run the same short list before every release, whether it is the first progress payment or retainage. The goal is that no payment leaves without a matching record of work, paperwork and waivers.

• Pay application received on time, lines matching the SOV and approved change orders
• Site walk done; each line certified with reasons for reductions, plus dated photos
• Stored or off-site material backed by the documents the contract requires
• Retainage calculated at the contract rate; cumulative totals reconcile with prior payments
• Unconditional waivers for the prior payment from the GC and listed subs and suppliers
• Conditional waivers for this payment, with amounts that match the certified figures
• Any discrepancy verified directly with the sub or supplier and explained in writing
• Builder's risk and liability certificates still current (see our insurance article)

Where your contract and local law take over

This article describes a control system, not the law of any state. Lien rights, notice requirements, deadlines for filing, prompt-payment rules, retainage limits and the exact form of waivers differ by jurisdiction. Some of them also differ between private and public work. Withholding a payment without a contractual basis can expose an owner to interest or a breach claim, while paying without waivers can leave the property exposed to liens. Before the first payment, have a construction attorney in the property's jurisdiction review the payment clauses, the waiver forms you plan to use and the lease's lien provisions. Keep every pay application, certification, waiver and payment record in the project file. If the job later stalls, as in the delay article linked below, that file is what lets you show what was paid against what was built.