Texas Retainage Law: 10% Fund, Notices, and Release Rules

Under Texas retainage law, the owner of a private construction project must hold back 10% of the original contract price during the work and for at least 30 days after the job is completed, terminated, or abandoned. That money is a statutory fund for subcontractors, suppliers, and laborers who did not contract directly with the owner. Chapter 53 of the Property Code governs private projects; Government Code Chapter 2252 sets separate caps for public works. The rules cut both ways: owners who under-withhold face liens on their own property, and subcontractors who miss a notice or filing deadline lose their claim to the fund entirely.1Justia. First Nat. Bank in Graham v. Sledge

The 10 Percent Fund on Private Projects

The 10% withholding is not contract retainage negotiated between the parties. It is a duty the statute imposes on the owner regardless of what the contract says, and it runs “with or without notice of a claim.”1Justia. First Nat. Bank in Graham v. Sledge

The 10% is calculated on the contract price between the owner and the original contractor, not on individual subcontract amounts. If the owner pays the general contractor in progress draws, the owner needs to withhold from each draw or otherwise keep 10% of the overall price in reserve at all times. Claimants who send the required notices and file a lien affidavit within the statutory window share in this pool, with laborers and mechanics taking priority over material suppliers.

Public Works Retainage Caps

When a governmental entity is the one contracting, Government Code Section 2252.032 sets tiered caps:2Texas Comptroller of Public Accounts. Retainage – eXpendit

  • Contracts under $5 million: retainage cannot exceed 10% of the contract price.
  • Contracts of $5 million or more: retainage cannot exceed 5% of the contract price.
  • Dam construction or maintenance: retainage cannot exceed 10% regardless of contract value.

The caps apply per line item in the bid schedule as well, so a governmental entity cannot shift retainage from one trade to another. Projects with a total estimated price below $400,000 at execution are exempt from these retainage rules altogether.3Justia Law. Texas Government Code 010.00.002252.00 – Exemptions

For competitively awarded contracts of $10 million or more, and for contracts not awarded through competitive bidding, the entity and the prime contractor may agree to deposit retainage in an interest-bearing account. On completion, the entity pays the remaining retainage plus earned interest to the contractor.4State of Texas. Texas Government Code Section 2252.032 – Retainage

Residential Projects Are Exempt

The statutory 10% fund does not apply to residential work. The Property Code defines a “residence” as a single-family house, duplex, triplex, or quadruplex, or an individual condominium or cooperative unit, owned by one or more adults and used or intended as a dwelling by one of the owners.5State of Texas. Texas Property Code Section 53.001 – Definitions

Homeowners on those projects are not required to withhold statutory retainage, though they can agree to contractual retainage. Subcontractors on residential jobs still have lien rights, but the notice deadlines are shorter and there is no mandatory statutory fund to reach.

Notices Subcontractors and Suppliers Must Send

A subcontractor or supplier who did not contract directly with the owner has to send written notices to preserve payment and lien rights. There are two, and missing either one is where most valid claims die.

Notice of Unpaid Labor or Materials

Under Section 53.056, the claimant must send written notice to both the owner and the original contractor. On nonresidential projects, the deadline is the 15th day of the third month after the month labor or materials were provided. On residential projects, the deadline is the 15th day of the second month.6State of Texas. Texas Property Code PROP Section 53.056 – Derivative Claimant

The notice has to identify the project, the claimant, the type of work or materials, the original contractor, the party the claimant contracted with if different, and the amount claimed. The statute provides a form, and the notice must substantially follow it.6State of Texas. Texas Property Code PROP Section 53.056 – Derivative Claimant

Notice of Unpaid Retainage

Section 53.057 sets a second, separate notice aimed at retainage. When a claimant’s retainage claim is not already covered by a Section 53.056 notice, the claimant must send a retainage-specific notice to the owner and original contractor to preserve access to the statutory fund. Without proper notice, the lien rights disappear regardless of how clear the underlying debt is.

Lien Affidavit Filing Deadlines

Retainage is the pool of money; the mechanic’s lien is what forces the pool open. Unpaid claimants file an affidavit with the county clerk, and if the owner failed to withhold properly, the claim can reach the owner’s property beyond the fund. Deadlines depend on the type of claim and the project:

When multiple claimants file against the same fund, laborers and mechanics are paid first, and the remaining balance is split proportionally among the other participating claimants.9State of Texas. Texas Property Code Section 53.105 – Owners Liability for Failure to Reserve Funds

When Retainage Gets Released

The owner must hold the statutory fund for at least 30 days after the original contract is completed, terminated, or abandoned. That is the window for claimants to file lien affidavits against the fund.1Justia. First Nat. Bank in Graham v. Sledge

If no valid claims land within the 30 days, the owner releases the retained funds to the general contractor. If claims are filed, the owner may hold back only enough to cover those specific claims and must release the balance. Holding the entire fund because one subcontractor filed a small claim against a larger balance is not something courts will back.

Projects with multiple phases or substantial-completion milestones can stagger retainage release if the contract provides for it. Contractors seeking release should submit lien waivers and a final pay application to avoid preventable delay.

Prompt Payment Overlay

On public works, the Prompt Payment Act adds a second timing layer. Under Government Code Chapter 2251, payments from governmental entities become overdue on the 31st day after the entity receives the goods, the service is completed, or the entity receives an invoice, whichever is latest, and interest accrues from the overdue date. This applies to retainage releases as well.10Texas Department of Transportation. The Prompt Payment Law

On private projects, Property Code Chapter 28 requires a contractor who receives payment, including retainage, to pay its subcontractors within seven days of receipt.11State of Texas. Texas Property Code Chapter 28

What Happens If the Owner Under-Withholds

An owner who does not retain the statutory 10% does not merely breach a contract. Under Section 53.105, claimants who followed the notice and filing procedures get a lien against the improvements and the land “at least to the extent of the amount that should have been reserved.”9State of Texas. Texas Property Code Section 53.105 – Owners Liability for Failure to Reserve Funds

That liability attaches even when it was the general contractor who failed to pay downstream. The withholding duty is independent of the contractor’s payment duty. An owner who cut the general contractor a check for 100% of the price can end up paying twice: once to the contractor, and again to clear a valid lien.1Justia. First Nat. Bank in Graham v. Sledge

Releasing retainage before the 30-day window closes carries the same risk. Courts treat early disbursement the same as a failure to withhold. If a valid claim shows up after the money is gone, the owner absorbs it.

Statutory Lien Waiver Forms

Section 53.284 of the Property Code sets four mandatory waiver forms. A waiver that does not substantially comply with the applicable form is unenforceable.12State of Texas. Texas Property Code PROP Section 53.284

  • Conditional waiver on progress payment. Effective only after the claimant’s check clears. Excludes unpaid retainage and future work.
  • Unconditional waiver on progress payment. Confirms payment through the specified date. Also excludes retainage.
  • Conditional waiver on final payment. Covers everything, including retainage, but only once the check clears.
  • Unconditional waiver on final payment. A complete release of lien and payment rights.

The progress payment forms are built so a subcontractor signing off on a periodic draw does not give up retainage rights, provided the waiver substantially follows the statutory language. Custom forms that broaden the release can be challenged under Section 53.284.12State of Texas. Texas Property Code PROP Section 53.284

Contract Retainage and the Statutory Fund

Most Texas construction contracts include their own retainage terms, often 5% to 10% withheld from each progress payment until substantial completion. Those provisions operate alongside the statutory requirement, and the two can overlap. The 10% statutory fund is a floor, not something added on top of whatever the contract sets.

Parties have wide latitude to negotiate retainage terms, but a contract cannot override the statutory protections for lien claimants. A clause that purports to waive lien rights, extend withholding indefinitely, or condition payment on events entirely within the owner’s control will face judicial skepticism. Where a contract term conflicts with the statutory lien framework, the statute controls.

A well-drafted contract should specify the retainage percentage, the trigger for release (typically substantial completion or a punch-list milestone), the documentation required for release such as statutory-form lien waivers and a final pay application, and a dispute resolution path like mediation for retainage disagreements.