What is a “Holdback” - Protecting the Owner and Sub-contractors
The Builders Lien Act exists to protect tradespeople and material suppliers from the unfortunate situation of providing labour and materials to improve property and then not getting paid. One of the ways that the Builders Lien Act does this is by establishing a mandatory 10% on each payment from the owner to the general contractor. The holdback provisions are set out in section 4 of the Act, which says that when someone is making a payment to the person below them in the contractual chain, they must hold back 10% of that payment until they are permitted to release it according to the Act. This 10% deduction is often referred to as the “holdback”. A general contractor may also keep a holdback from its sub-contractors, particularly on larger projects where there are multiple levels of sub-contractors, but the most common form of holdback is the one kept by the owner.
Under section 5 of the Act, the owner is supposed to set up a holdback account at the start of a project, and jointly administer the holdback account with the general contractor. The Act does waive the holdback account requirement for contracts that are less than $100,000 in aggregate value. Regardless of whether it is kept in a special holdback account, or just retained by the owner, the holdback will grow over the course of the project as the owner makes payments to the general contractor and holds back 10% from those payments.
The reason that a holdback is a good thing is that it protects both the owner and the sub-contractors. Many general contractors have, often through no fault of their own, ended up insolvent and unable to pay sub-contractors and material suppliers. The holdback protects those parties by making sure that there is money available to pay their invoices, without them having to go through the lengthy process to execute against the property. The owner is also protected from the frustrating situation of having paid the general contractor 100% of their invoices only to face lien claims from sub-contractors and potentially having to pay for work or materials twice.
A holdback account can also be complicated and potentially contentious. If it were up to the general contractor, they’d probably prefer to get paid 100% of each invoice and not to have a holdback at all, and when you consider the cash-flow challenges that arise from having 10% of each invoice held back, this is not surprising. The general contractor will also likely want the holdback released as soon as possible under the Act. If you are a homeowner embarking on a large renovation or construction project, you would be wise to understand your obligations holdback obligations under the Act. If you’re unsure, a consultation with a Victoria builders lien lawyer can help you to protect yourself, be fair to your general contractor, and protect the sub-contractors, all by properly keeping a holdback account.
