Prompt Payment in Construction Contracts

Construction contracts often contain retention language. That is, an upstream party may retain a set percentage of payments to a downstream party during the course of the project. For example, a property owner might enter into a contract with a general contractor, but the property owner is entitled to withhold 10% of payment amounts. In turn, the general contractor might have a corresponding provision in its subcontracts. The retained amounts are typically paid once the project is complete, or upon substantial completion.

Why would a contractor agree to accept less than the full amount?

The construction industry is awash in risk. Property owners risk serious, sometimes permanent, damage to their property if the contractor does not perform. For contractors, large projects might monopolize their resources, and one missed payment can have dramatic effects on their ability to meet payroll, pay suppliers, or keep a project moving.

Retention is one way the industry allocates that risk. By retaining a portion of each payment, property owners pay contractors nearly all of the amount due, while holding back a percentage to incentivize completion and correction of defects. From the contractor’s perspective, the retained amounts are relatively small (usually 5% to 10%) and are expected to be released at the end of the job.

Prompt payment statutes exist to make sure that expectation is not illusory.

Most prompt payment laws do not prohibit retention outright. Instead, they regulate when progress payments and retention must be paid, and they impose consequences when payments are improperly delayed. Those consequences often include statutory interest, penalties, and, in many cases, attorney’s fees. In other words, retention is meant to be a temporary risk-management tool, not leverage to force downstream parties to finance the project indefinitely.

California is a good example of this balance. On private works, retention is generally capped, and once a project reaches completion, owners and general contractors have a relatively short window to release retention. (Cal. Civ. Code section 8811). If they do not, interest begins to accrue automatically. Importantly, the statutes are not limited to owners. A general contractor that sits on a subcontractor’s retention can face the same statutory interest and fee exposure as an owner who delays payment to the general contractor.

Texas takes a slightly different approach but reaches a similar result. Texas law permits retainage but imposes strict deadlines for payment once work is completed or a proper invoice is submitted. If an upstream party fails to pay on time, interest accrues at a statutory rate that can quickly exceed market rates. In some cases, nonpayment can also support claims beyond breach of contract, particularly where funds are withheld without a legitimate dispute. For public works, see Tex. Gov. Code section 2252.032; for private works, see Tex. Prop. Code section 53.101 et seq.

These statutes matter because prompt payment disputes rarely arise in a vacuum. A delayed retention payment at the end of a project often coincides with other pressure points: close-out documents, punch list items, warranty issues, or finger-pointing over alleged defects. Owners and general contractors sometimes assume that withholding retention gives them negotiating leverage. Prompt payment laws flip that assumption by making delay expensive.

For contractors and subcontractors, the lesson is that retention is not “just part of the deal” that must be tolerated indefinitely. Statutory deadlines can create real leverage, particularly when interest and attorney’s fees are in play. For owners and upstream parties, the takeaway is equally important: retention should be administered carefully and released promptly once the contractual and statutory conditions are met. What begins as a modest holdback can quickly turn into a costly statutory violation.

At the end of the day, prompt payment statutes are less about punishing nonpayment and more about keeping cash flowing on construction projects. Retention is allowed—but only within limits. When those limits are ignored, the risk shifts rapidly to the party holding the check.