The Five Percent Problem: Why Knoxville Construction Payment Disputes Keep Circling Back to Retainage
Every construction project in Knoxville, from a medical office in Hardin Valley to a mixed-use building downtown, runs on a chain of promises. The owner pays the general contractor, the general contractor pays its subcontractors, and somewhere down the line a supplier waits on a check that depends on every link above it. As Knoxville construction law attorneys, we have noticed that many of the most revealing payment disputes turn on a surprisingly small slice of money: retainage.
Why Does So Much Conflict Hide in Such a Small Number?
Retainage is the portion of each progress payment held back until the work is done. Under Tenn. Code Ann. § 66-34-103, part of Tennessee’s Prompt Pay Act, retainage on public and private projects cannot exceed five percent of the contract amount. Five percent sounds modest. On a $3 million project, it is $150,000 sitting outside a contractor’s bank account.
The statute also sets a clock. Owners generally must release retainage within 90 days after the work is completed or the project is substantially complete, whichever comes first. Each tier below then has 10 days to pass it down. On paper, the math is tidy. In practice, one disagreement about what “complete” means can freeze the entire chain.
Where Exactly Is the Money Sitting?
Tennessee goes further than most people expect. Tenn. Code Ann. § 66-34-104 regulates not just how much is held back, but where it waits. A few features stand out:
- Retained funds must go into a separate, interest-bearing escrow account with a third party.
- Once withheld, those funds become the property of the contractor they are owed to, subject to certain rights if that contractor defaults.
- The party holding retainage must give written notice naming the financial institution, account number, and amount deposited.
- Failing to escrow the funds can trigger $300 per day in damages, and the requirement cannot be waived by contract.
These escrow rules apply when the prime contract is $500,000 or more, and they reach every subcontract beneath it regardless of size. A small trade contractor may hold protections it never knew existed.
When $18,000 Becomes Something Much Larger
The daily figure is not theoretical. In a 2021 decision, the Tennessee Supreme Court reviewed a dispute over roughly $18,000 in subcontractor retainage that was never escrowed on a Nashville project. The court read the statute to mean the $300 amount accrues each day the funds sit outside a compliant account, and it explained that a one-year limitations period did not necessarily bar daily amounts accruing within the year before suit was filed.
That reasoning raises uncomfortable questions for any Knoxville job site. How many subcontractors ever ask where their retainage is held? How many general contractors send the required notice with every pay application? Often, nobody checks until a payment goes missing.
The Paper Trail Usually Tells the Story
Most payment disputes begin not with a statute but with a change order approved over the phone or a pay application left unanswered. The law enters later, once the parties’ records tell different stories.
Wondering Where Your Money Went?
If a stalled payment has you asking about retainage, escrow, or timing on a Knoxville project, we would be glad to hear what is happening. Our Knoxville construction lawyers at Reynolds, Atkins, Brezina & Stewart, PLLC, work with owners, contractors, and subcontractors across East Tennessee. Call us or reach out online to start the conversation.
Source:
tncourts.gov/courts/supreme-court/opinions/2021/06/30/snake-steel-inc-v-holladay-construction-group-llc
