More Frequently Asked Lien Questions
Blog Post Date: 22-Jun-2015 Author: Corbin Devlin
I am frequently asked by owners, contractors or construction managers, which subcontracts or material supply contracts are subject to lien holdback requirements? There is an easy answer to this question, and a hard one.
It does not matter if the owner is dealing with a general contractor, trade contractor, material supplier or other service provider; if they have lien rights, and they are contracting directly with the owner, then the owner should (indeed, must) take a 10% holdback from them.
There is good reason for the contractor (the party contracting directly with the project owner) to provide for a holdback in its’ subcontracts. It is a question of risk and cash flow. The contractor is at risk of liability to the owner if liens are registered by subcontractors or those further down the chain, so the holdback gives the contractor a measure of protection. If the contractor will not receive its’ holdback until substantial completion, then in accordance with the lien legislation, the contractor will want to protect its’ cash flow by taking a corresponding holdback from its’ subcontractors.
This is one of those issues that varies from province to province. For example, in Saskatchewan, a holdback on subcontracts is required by statute, unlike Alberta which leaves this issue to be dealt with by contract law.
Material Suppliers and Service Providers
In short, it is a question of contract law as to whether subcontractors, material suppliers and service providers – those who are not in a direct contractual relationship with the project owner – are subject to a holdback. In theory, the contractor has to negotiate for this right when it is negotiating payment terms with its’ subcontractors, material suppliers and service providers. In some sectors (i.e. the major trades), this is no issue. In other sectors such holdbacks are not the norm. When a party with lien rights refuses to agree to a holdback, the contractor can negotiate the issue, incur the risk, or find another party to contract with.