Retainage in Texas Construction: When It Must Be Released and What Happens When It Isn't

By Hank FasthoffJuly 5, 2026

Retainage is the portion of each progress payment that the paying party withholds as a performance guarantee during construction. On a $1 million contract with 10 percent retainage, the owner pays 90 cents of every dollar earned and holds back the remaining 10 cents until the project is complete. By the end of the project, $100,000 stays in the owner's hands, and the contractor doesn't receive it until the work is finished and accepted.

Retainage protects owners against incomplete or defective work. It also creates cash flow pressure on contractors and subcontractors who've performed the work, paid their labor and suppliers, and are waiting for money they've already earned. Texas regulates retainage on both private and public projects, and the rules governing how much can be withheld, how long it can be held, and what triggers its release differ depending on whether the project is privately or publicly owned.

Statutory Retainage on Private Projects

Texas Property Code § 53.101 requires the owner of a private construction project to retain 10 percent of the contract price during the progress of work. If there's no set contract price (as in a cost-plus arrangement), the owner must retain 10 percent of the value of the work performed. After the 2021 amendments (HB 2237, effective for original contracts entered into on or after January 1, 2022), Chapter 53 refers to this statutory holdback as "Reserved Funds."

Every private project owner in Texas must withhold Reserved Funds, regardless of the contract's retainage provisions. An owner who pays the full contract price without retaining 10 percent is personally liable to subcontractors and suppliers up to the amount that should have been retained. If the GC walks off the project or goes bankrupt, subcontractors can pursue the owner for funds the owner was supposed to hold but didn't.

Reserved Funds must be maintained for at least 30 days after the original contract is completed, terminated, or abandoned. § 53.101. During that 30-day window, subcontractors and suppliers with valid lien claims can assert their claims against the retained funds.

Contractual Retainage Flows Downstream

Chapter 53's retainage requirement applies only to the owner-to-GC relationship. It doesn't automatically flow down to the GC-to-sub relationship. GC-to-sub retainage (now called simply "Retainage" under the 2022 terminology) is governed by the subcontract, not by statute. If your subcontract provides that the GC retains 10 percent, that's a contractual obligation between you and the GC, separate from the owner's statutory obligation under § 53.101.

On public projects, the downstream rules are different. Under Texas Government Code § 2252.032(d), the prime contractor can't withhold a greater percentage of retainage from a subcontractor than what the governmental entity withholds from the prime. And a subcontractor can't withhold more from a sub-subcontractor than what's withheld from the subcontractor. Retainage percentages must cascade downward at the same rate or lower, not higher.

Retainage Caps on Public Projects

Public project retainage is governed by Texas Government Code § 2252.032, which imposes caps based on contract value.

For public works contracts with a total value under $5 million, the governmental entity can't withhold retainage exceeding 10 percent of the contract price. For contracts valued at $5 million or more, retainage is capped at 5 percent. For dam construction or maintenance contracts, retainage is capped at 10 percent regardless of contract value.

Contracts valued at $10 million or more (competitively awarded) require the governmental entity and prime contractor to deposit retained funds in an interest-bearing account. When the retained funds are released, the interest earned on the retainage goes to the contractor along with the principal.

Public project retainage caps can't be increased by contract. A governmental entity that withholds 15 percent on a $6 million contract has exceeded the statutory 5 percent cap, and the excess is owed to the contractor.

When Retainage Must Be Released

On private projects, retainage release is governed by the contract terms and the Prompt Payment Act (Texas Property Code Chapter 28). Once the project reaches substantial completion and the contractor submits a final pay application, the owner must release retained funds within the time specified in the contract, subject to the Prompt Payment Act's 35-day deadline for owner payments. Interest accrues at 1.5 percent per month on retainage that's held beyond the statutory payment deadline.

On public projects, Government Code § 2252.032(e) prohibits the governmental entity from withholding retainage after completion of the work required under the contract, including during the warranty period. A governmental entity can't hold retainage as a guarantee against warranty claims once the work is finished.

A governmental entity may continue withholding retainage after completion only if there's a bona fide dispute over whether labor, services, or materials comply with the contract terms, and only if the entity provides the contractor written notice explaining the basis for withholding. If there's no dispute and neither party is in default, the contractor is entitled to cure any noncompliant work and receive the retained funds.

The 2025 Audit Loophole Fix

Before 2025, some owners and governmental entities used extended post-completion audits to delay retainage release, arguing that the audit constituted an ongoing "bona fide dispute." Under HB 3005 (effective September 1, 2025, for contracts entered into on or after that date), Texas Property Code § 28.003(c) and Government Code § 2251.002(c) provide that an audit continuing more than 60 days after substantial completion no longer qualifies as a bona fide dispute that justifies withholding payment. This amendment closed a loophole that owners used to defer retainage release for months after the work was finished.

How Subcontractors Claim Retainage

Subcontractors claiming unpaid retainage on a private project must satisfy the notice and filing requirements under Chapter 53. For statutory retainage (Reserved Funds held by the owner), the subcontractor must send the required pre-lien notices under § 53.056 and file a lien affidavit within 30 days after the original contract is completed, terminated, or abandoned. § 53.103.

For contractual retainage (funds held by the GC under the subcontract), § 53.057 establishes a separate notice process. A subcontractor who sent proper retainage notices under § 53.057 has a perfected lien on contractual retainage if the lien affidavit is recorded by the 15th day of the third month after the original contract was completed, terminated, or abandoned.

Missing these deadlines eliminates the subcontractor's lien rights on the retainage. The underlying debt may still exist, but the security interest in the property (or in the retained funds) is gone, and a breach of contract claim against the GC without a lien is far less powerful than a lien claim against the owner's property.

Lien Waivers and Retainage

Progress payment lien waivers and retainage interact in ways that catch subcontractors off guard. Under the four statutory lien waiver forms codified at Texas Property Code §§ 53.281-53.284 (effective for contracts entered into on or after January 1, 2022), conditional and unconditional waivers on progress payments exclude retainage. A subcontractor who signs a conditional waiver on a progress payment isn't waiving lien rights on retainage that hasn't been paid.

Conditional and unconditional waivers on final payment, however, cover everything, including retainage. A subcontractor who signs a final payment waiver before receiving the retainage has released the lien rights that protected that retainage. Don't sign a final waiver until you've been paid in full, including retainage. If the GC asks for a final waiver as a condition of releasing retainage, insist on a conditional waiver that becomes effective only after your check clears.

Any lien waiver that doesn't substantially comply with one of the four statutory forms is unenforceable. § 53.284. This protection prevents owners and GCs from using custom waiver language to extract broader releases than the statute permits.

The Statutory Payment Bond Alternative

Under Texas Property Code § 53.202, a general contractor can provide a statutory payment bond that relieves the owner of the retainage withholding obligation. If the GC delivers a qualifying bond (in the full contract amount, executed by a Texas-admitted corporate surety, conditioned on prompt payment, and recorded in the county real property records with the prime contract), subcontractor liens no longer attach to the owner's property. Instead, the bond becomes the subcontractor's source of recovery.

For owners, a statutory payment bond eliminates the obligation to withhold 10 percent, eliminates fund-trapping liability, and prevents subcontractor liens from clouding the property's title. For subcontractors, the bond provides a more reliable payment source than a proportionate share of retained funds, because the bond covers the full contract amount rather than just the 10 percent retainage.

Practical Recommendations for Contractors and Subcontractors

Don't wait until the end of the project to address retainage. Confirm the retainage percentage in your contract, understand when it will be released, and calendar the deadlines for sending retainage notices under Chapter 53.

Send retainage notices early. Under § 53.057, the notice deadline for contractual retainage claims can arrive sooner than the general lien notice deadline, and missing it eliminates your lien rights on the retained funds even if your general lien is perfected.

Track whether the owner is withholding the statutory 10 percent. If the owner isn't retaining Reserved Funds, the owner is personally liable for the amount that should have been retained. This information is relevant if the GC defaults and you need to pursue the owner directly.

Never sign an unconditional final lien waiver before receiving full payment, including retainage. Use the statutory conditional waiver forms, and confirm that your waiver on progress payments excludes retainage.

If retainage is withheld beyond the contractual release date or the Prompt Payment Act deadline, send a written demand and document the late payment. Interest accrues at 1.5 percent per month on private projects, which adds up quickly on a six-figure retainage balance.