Construction Holdback Requirements – Not for Dummies
Statutory construction holdback requirements can be remarkably tricky to interpret, presenting challenges for both novice and experienced players in the construction industry.
It is important to note that holdback requirements under the Alberta Builders’ Lien Act apply to projects of any size, from major industrial facilities to home renovations. In some sectors, particularly residential construction, holdback requirements are frequently misunderstood (to the considerable peril of the homeowner, who is often inexperienced regarding holdbacks and liens). In other sectors, particularly some professional design services and material suppliers, holdbacks are intentionally avoided, even if the Builders’ Lien Act is applicable.
On the other hand, there are all kinds of projects and lands exempt from builders’ liens – and therefore exempt from the corresponding holdback requirements. Most of the exemptions relate to projects of a “public” nature. Public highways and lands owned by irrigation districts are exempt. Interests in land owned by the federal or provincial governments are exempt. But not all infrastructure projects or projects with government involvement are exempt. For example, municipalities are not generally exempt - although particular municipal projects or lands may fall within another exemption.
Statutory holdback requirements are the responsibility of the owner, not the contractor or subcontractors or suppliers. However, statutory requirements are often supplemented by contractual holdback requirements. That is, contractors and subcontractors may also be responsible for holdbacks under their contracts and subcontracts, and sometimes construction managers are contractually responsible for taking care of statutory holdback requirements on behalf of construction owners. In Alberta, it is against the law to make a contract to the effect that the Builders’ Lien Act does not apply, but there is no problem with a contract that supplements the statutory requirements.
As a general rule, the statutory holdback requirement is 10% of the value of the work actually done. In practice, this typically means that the owner deducts 10% from invoiced amounts. In some provinces, the holdback has to be placed into a separate account, but in Alberta the owner simply keeps the holdback in pocket. After the work is complete, the owner must then wait 45 days before releasing the holdback, or 90 days if the work relates to an oil or gas well. The prudent construction owner (or lender) will always check the title to make sure no liens have been registered prior to releasing payment of the holdback. And if any liens have been registered, the prudent owner will make arrangements for discharge of those liens before making any further payments.
There are provisions for releasing the holdback early, or in stages (“progressively”) which can be very important on larger construction projects. In the simplest terms, a Certificate of Substantial Performance may be used to authorize the release of part of the holdback – that is, the holdback in relation to the value of work performed before the Certificate is posted – even though the work is not yet entirely complete. (The tricks and traps associated with the progressive release of holdbacks is a subject for a future article.)
Most importantly, why does the statute impose a holdback requirement? The underlying purpose is to provide a fund to protect subcontractors and suppliers in the event of insolvency or payment default by others involved in the project. In practical terms, the construction owner must abide by the holdback requirements, or face the risk of making double payment (i.e. coming up with the money to pay subcontractors and suppliers out of the owner’s own pocket if there is no holdback).
Holdbacks are a big consideration for construction owners and builders alike in terms of construction financing, cash flow, payment security, and just plain old contract administration. Contact us if you require more information regarding your holdback rights and obligations.
It is important to note that holdback requirements under the Alberta Builders’ Lien Act apply to projects of any size, from major industrial facilities to home renovations. In some sectors, particularly residential construction, holdback requirements are frequently misunderstood (to the considerable peril of the homeowner, who is often inexperienced regarding holdbacks and liens). In other sectors, particularly some professional design services and material suppliers, holdbacks are intentionally avoided, even if the Builders’ Lien Act is applicable.
On the other hand, there are all kinds of projects and lands exempt from builders’ liens – and therefore exempt from the corresponding holdback requirements. Most of the exemptions relate to projects of a “public” nature. Public highways and lands owned by irrigation districts are exempt. Interests in land owned by the federal or provincial governments are exempt. But not all infrastructure projects or projects with government involvement are exempt. For example, municipalities are not generally exempt - although particular municipal projects or lands may fall within another exemption.
Statutory holdback requirements are the responsibility of the owner, not the contractor or subcontractors or suppliers. However, statutory requirements are often supplemented by contractual holdback requirements. That is, contractors and subcontractors may also be responsible for holdbacks under their contracts and subcontracts, and sometimes construction managers are contractually responsible for taking care of statutory holdback requirements on behalf of construction owners. In Alberta, it is against the law to make a contract to the effect that the Builders’ Lien Act does not apply, but there is no problem with a contract that supplements the statutory requirements.
As a general rule, the statutory holdback requirement is 10% of the value of the work actually done. In practice, this typically means that the owner deducts 10% from invoiced amounts. In some provinces, the holdback has to be placed into a separate account, but in Alberta the owner simply keeps the holdback in pocket. After the work is complete, the owner must then wait 45 days before releasing the holdback, or 90 days if the work relates to an oil or gas well. The prudent construction owner (or lender) will always check the title to make sure no liens have been registered prior to releasing payment of the holdback. And if any liens have been registered, the prudent owner will make arrangements for discharge of those liens before making any further payments.
There are provisions for releasing the holdback early, or in stages (“progressively”) which can be very important on larger construction projects. In the simplest terms, a Certificate of Substantial Performance may be used to authorize the release of part of the holdback – that is, the holdback in relation to the value of work performed before the Certificate is posted – even though the work is not yet entirely complete. (The tricks and traps associated with the progressive release of holdbacks is a subject for a future article.)
Most importantly, why does the statute impose a holdback requirement? The underlying purpose is to provide a fund to protect subcontractors and suppliers in the event of insolvency or payment default by others involved in the project. In practical terms, the construction owner must abide by the holdback requirements, or face the risk of making double payment (i.e. coming up with the money to pay subcontractors and suppliers out of the owner’s own pocket if there is no holdback).
Holdbacks are a big consideration for construction owners and builders alike in terms of construction financing, cash flow, payment security, and just plain old contract administration. Contact us if you require more information regarding your holdback rights and obligations.