Litigation Law Newsletter Volume 1, Number 1: What is a Construction Holdback and How Does it Affect Homeowners?

January Focus:

What is a Construction Holdback and How Does it Affect Homeowners?

Most homeowners are unaware of this concept and, as a result, can lose significant sums of money when renovating their homes.

How it Works:

Suppose your contractor bills you $100,000 for constructing parts of the residence.  If you are unaware of what a ‘holdback’ is, you would probably pay the contractor that amount in full.  That would be wrong.

If you pay that amount, and for some reason the contractor fails to pay his subcontractor the amount the subcontractor is owed for his labour and materials (which happens more than you think), the subcontractor can sue you personally for up to 10% of the amount you paid.  In this example, you would be required to pay the subcontractor an additional $10,000, thus bringing your total to $110,000, even though you already paid the contractor for the subcontractor’s work.

Construction projects are expensive, and this simple mistake can repeat itself over and over.  If the entire project is worth $1 million, and you paid your contractor that amount in full without holding back 10%, you could be personally liable to pay the subcontractor an additional $100,000.

How to avoid this mistake:

Be sure to hold back 10% of all amounts you pay your contractor until the residence is completed and approved.