There are a
few tricks and traps associated with the progressive release of builders’ lien
holdbacks. As mentioned in a prior article, the Alberta Builders’ Lien Act includes
provisions for releasing the statutory holdback early, or in stages
("progressively"), which can be very important to promote cash flow
on larger construction projects. In the simplest terms, a Certificate of
Substantial Performance may be used to authorize the release of part of the
holdback – that is, the holdback in relation to the value of work referenced in
the Certificate – even though the overall project is not yet entirely complete.
Basic Principles
As a
starting point, the Builders’ Lien Act requires the owner to retain a 10% lien
holdback throughout construction. On large projects, this can result in a
significant drag on cash flow to the contractor and subcontractors. In
particular, subcontracts often provide that payment of the subcontractor’s
holdback is not due until the general contractor receives corresponding payment
from the owner. This can result in a subcontractor waiting an
extended time to receive its holdback. The progressive release of
holdback mechanism exists to remedy this problem.
Importantly,
either the general contractor or a subcontractor can post a Certificate of
Substantial Performance in respect of the work of the subcontractor. This
gives the subcontractor a measure of control over the timing of release of
holdback by the project owner. It also provides a means by which the
overall holdback on the project can be reduced in several stages, as various
subcontracts are completed. If a Certificate is properly posted, and no
liens are registered, the project owner may safely release the portion of the
statutory holdback associated with the Certificate 46 days after the
Certificate is posted.
Basic
Example
Consider
for example a construction project that is expected to extend over two full
years. A subcontractor who does all his work in year one does not want to
wait another year to receive his portion of the owner’s builders lien
holdback. So, the Act permits the general contractor or the subcontractor
to post a Certificate when the subcontractor’s work is substantially
performed. Assuming no liens are registered, the owner can safely
release the portion of the holdback attributable to that subcontractor 46 days
after the Certificate was posted.
On a $10M general
contract, the holdback at the end of the project would be $1M if not for
progressive release of holdback provisions. But the progressive release
of holdback by the owner in relation to the early completion of a $500k
subcontract would reduce the statutory holdback by $50k (i.e. 10% of the
subcontract value), such that the owner’s statutory holdback is reduced to
$950k at the end of the project. The owner retains the holdback to comply
with the Builders’ Lien Act, but also to protect itself against insolvency or
default by any contractor on the project. In our example, assuming the
owner has complied with the legislation in progressively releasing $50k upon
completion of the subcontract, the owner’s liability for the holdback is
reduced from $1M to $950k.
Permissive
vs. Mandatory
One thing
to keep in mind is that the Builders’ Lien Act permits the progressive release
of holdback; it does not require it. General contractors and
subcontractors who want to be able to insist on progressive release of holdback
by the owner must ensure there are contract provisions that require the owner
to progressively release the holdback. For example:
When 45
days have expired from the date of issue of the certificate of substantial
performance in respect of that Subcontractor’s subcontract, as verified by the
Consultant, and no builders’ liens have been registered for the Work, the Owner
shall promptly release that Subcontractor’s portion of the major lien fund to
the Contractor. If no builders’ liens have been registered for the Work,
the Contractor shall promptly release that portion of the major lien fund to
that Subcontractor. (Canadian Construction Association, CCDC 2 (2008)
Supplementary General Conditions for use only in the Province of Alberta)
Subcontractors
might want to ensure that progressive release of holdback provisions are
included in both their subcontract and the general contract; an omission of
such provisions from either contract could prevent the subcontractor from
insisting on the progressive release of holdback. (Sub-subcontractors
should ensure that such provisions are included in the general contract and
every subcontract in the chain.)
Other
Tricks and Traps
As always,
owners must minimize their risk of liability under the Builders’ Lien Act by
ensuring that the subcontractor or general contractor has complied with
statutory requirements, before making a progressive release of holdback.
Many contracts are structured to include administrative requirements that
mirror the statutory requirements, thereby protecting the owner who follows his
contract. Other contracts do not get into such detail regarding
conditions for payment. Above all, and in any event, the owner should
check title to the project lands, to ensure no lien claims have been registered
(for claims arising under the general contract in question) before making any
payment on the contract, for progressive release of holdback or otherwise.
Finally, it
is important to note that the legislation only contemplates the progressive release
of holdback upon the substantial completion of an entire contract or
subcontract. It is not consistent with the legislation, and may
expose the owner to financial risk, to progressively release holdback
month-to-month, or in association with the completion of a phase of work that
does not comprise an entire contract or subcontract. I have seen a number
of circumstances where the concept of progressive release of holdback is
misunderstood, sometimes even set out by contract in a way that does not comply
with the statute, resulting in significant financial risk to the owner (i.e.
potential shortfall in the statutory holdback).
Properly
accounting for multiple progressive releases of holdback can be challenging
under any contract. Experienced contract administrators and project
managers are familiar with these challenges. But we know from experience
that administration of progressive releases is not straightforward, and errors
can happen through inadvertence or inexperience.
