Author: Corbin Devlin
I am frequently asked by owners, contractors or construction
managers, which subcontracts or material supply contracts are subject to
lien holdback requirements? There is an easy answer to this question,
and a hard one.
The Legislation
The easy answer is that the Alberta Builders’ Lien Act only requires a lien holdback by the owner. So, only those contracting directly with the project owner are required by statute to submit to a 10% holdback – and it is the owner, not the contractor, that has the statutory obligation to hold back this amount.
The easy answer is that the Alberta Builders’ Lien Act only requires a lien holdback by the owner. So, only those contracting directly with the project owner are required by statute to submit to a 10% holdback – and it is the owner, not the contractor, that has the statutory obligation to hold back this amount.
It
does not matter if the owner is dealing with a general contractor,
trade contractor, material supplier or other service provider; if they
have lien rights, and they are contracting directly with the owner, then
the owner should (indeed, must) take a 10% holdback from them.
The Subcontract
If the legislation does not require it, why is there usually a 10% holdback on subcontracts? The answer to this question is found in the subcontract itself. In Alberta there is no statutory requirement for holdback on subcontracts; but this requirement is found in most subcontracts (including standard forms), and arguably it is a standard industry practice in some sectors even if there is no subcontract in writing. In other words, subcontractors are not required by statute to allow for a 10% holdback – but they are often required by contract to allow for a 10% holdback.
If the legislation does not require it, why is there usually a 10% holdback on subcontracts? The answer to this question is found in the subcontract itself. In Alberta there is no statutory requirement for holdback on subcontracts; but this requirement is found in most subcontracts (including standard forms), and arguably it is a standard industry practice in some sectors even if there is no subcontract in writing. In other words, subcontractors are not required by statute to allow for a 10% holdback – but they are often required by contract to allow for a 10% holdback.
There is good reason for
the contractor (the party contracting directly with the project owner)
to provide for a holdback in its’ subcontracts. It is a question of risk
and cash flow. The contractor is at risk of liability to the owner if
liens are registered by subcontractors or those further down the chain,
so the holdback gives the contractor a measure of protection. If the
contractor will not receive its’ holdback until substantial completion,
then in accordance with the lien legislation, the contractor will want
to protect its’ cash flow by taking a corresponding holdback from its’
subcontractors.
This is one of those issues
that varies from province to province. For example, in Saskatchewan, a
holdback on subcontracts is required by statute, unlike Alberta which
leaves this issue to be dealt with by contract law.
Material Suppliers and Service Providers
What about material suppliers, or those who supply only services? As far as the legislation goes, the same analysis applies. However, in some sectors it is uncommon for material suppliers, or those who supply only labour or services, to agree to a 10% holdback by contract. Certain material suppliers have the clout to refuse to allow holdbacks and for some reason lien holdbacks are simply unusual for some service providers (particularly design professionals). It is often overlooked that even these parties who would purportedly refuse to allow lien holdbacks can’t escape the legislation; if they have lien rights, and they are in a direct contract with the owner, the owner is not only permitted but required to withhold 10% from them.
What about material suppliers, or those who supply only services? As far as the legislation goes, the same analysis applies. However, in some sectors it is uncommon for material suppliers, or those who supply only labour or services, to agree to a 10% holdback by contract. Certain material suppliers have the clout to refuse to allow holdbacks and for some reason lien holdbacks are simply unusual for some service providers (particularly design professionals). It is often overlooked that even these parties who would purportedly refuse to allow lien holdbacks can’t escape the legislation; if they have lien rights, and they are in a direct contract with the owner, the owner is not only permitted but required to withhold 10% from them.
In short, it is a question of contract law as
to whether subcontractors, material suppliers and service providers –
those who are not in a direct contractual relationship with the project
owner – are subject to a holdback. In theory, the contractor has to
negotiate for this right when it is negotiating payment terms with its’
subcontractors, material suppliers and service providers. In some
sectors (i.e. the major trades), this is no issue. In other sectors such
holdbacks are not the norm. When a party with lien rights refuses to
agree to a holdback, the contractor can negotiate the issue, incur the
risk, or find another party to contract with.
