Tennessee Prompt Pay Act: A Subcontractor's Guide to Retainage, Escrow Accounts, and Getting Paid

Few construction businesses feel payment pressure more directly than subcontractors. A subcontractor may complete its scope of work, pay its employees, purchase materials, rent equipment, coordinate with suppliers, and meet every project deadline — only to be told that payment has not been released. Sometimes the explanation is familiar. The owner has not paid yet. The architect has not approved the pay application. The general contractor is waiting on funding. There are unresolved punch list items. The retainage will be released later.

For subcontractors, these delays are not minor administrative issues. Delayed payment can affect payroll, supplier accounts, bonding capacity, credit lines, equipment obligations, and the ability to take on new work. Tennessee law recognizes that payment delays can create serious problems throughout the construction chain. That is one reason the Tennessee Prompt Pay Act exists. The Prompt Pay Act of 1991, found in Tenn. Code Ann. § 66-34-101, et seq., establishes important rules governing construction payments, retainage, escrow accounts, and the release of withheld funds. For subcontractors, the Act can provide powerful protections that are often overlooked until a payment dispute has already developed.

Why Subcontractors Need to Understand the Prompt Pay Act

Subcontractors often sit in the most vulnerable position on a construction project. They usually do not control the owner's financing. They usually do not control the general contractor's pay application process. They often have no direct contract with the project owner. Yet they are expected to perform the work, pay labor, purchase materials, and keep the project moving. When payment stops upstream, subcontractors are often the first to feel the financial pain.

The Tennessee Prompt Pay Act is important because it regulates how money should move through the construction chain. It addresses not only whether retainage may be withheld, but also how much may be withheld, when it must be released, and what happens if retained funds are not properly handled. For subcontractors, understanding these rules can create leverage in disputes involving unpaid invoices, withheld retainage, delayed final payments, and general contractors who refuse to release funds after receiving payment.

Retainage Is Not Unlimited in Tennessee

Retainage is common in construction. General contractors and owners often withhold a percentage of each payment as security for completion of the work. Subcontractors frequently accept retainage as part of doing business. But Tennessee law places limits on retainage. Under Tenn. Code Ann. § 66-34-103(a), retainage on construction contracts generally may not exceed five percent of the contract amount. That matters. A subcontractor should not simply assume that a ten percent retainage provision is enforceable because it appears in a subcontract. Tennessee law specifically limits retainage, and that limitation can become important when a subcontractor is trying to recover money at the end of a project. For example, assume a subcontractor enters into a $400,000 subcontract. A five percent retainage equals $20,000. A ten percent retainage equals $40,000. That difference matters, especially for trade contractors operating on tight margins. Subcontractors should review retainage provisions before signing a subcontract and again when payment problems arise.

Retainage May Have to Be Placed in Escrow

One of the most important protections in the Tennessee Prompt Pay Act is also one of the least understood. Under Tenn. Code Ann. § 66-34-104(a), when retainage is withheld on qualifying projects, the retained funds must be deposited into a separate, interest-bearing escrow account with a third party. Many subcontractors have never been told this. Many have never received escrow account information. Many assume the general contractor or owner simply holds retainage in a normal operating account. That is not what the statute requires on covered projects.

The escrow requirement exists for an important reason. Retainage is supposed to secure performance. It is not supposed to become working capital for someone else. By requiring retained funds to be segregated in an escrow account, the statute helps protect contractors and subcontractors from the risk that retained money will be spent, commingled, or unavailable when payment becomes due.

Retained Funds May Already Be Your Property

The Prompt Pay Act contains a provision that every subcontractor should understand. Under Tenn. Code Ann. § 66-34-104(b), once retainage is withheld, those retained funds become the sole and separate property of the prime contractor or remote contractor to whom they are owed, subject to the rights of the withholding party if the contractor defaults or fails to complete its contract. In plain English, retained funds are not simply “extra money” that the owner or general contractor may hold indefinitely. The statute treats those funds as belonging to the contractor or subcontractor entitled to receive them, subject to legitimate contract rights. This matters because many subcontractors think of retainage as money they may eventually receive if everyone else decides to release it. The Prompt Pay Act frames the issue differently. If the subcontractor performed the work and the funds are owed, the retained money may already be treated as the subcontractor's property under the statute, even if payment has not yet been released. That concept can be powerful in a payment dispute.

The Escrow Information Subcontractors Should Ask For

The Prompt Pay Act does not merely require certain retained funds to be placed in escrow. It also requires information to be provided. Under Tenn. Code Ann. § 66-34-104(d), the party responsible for depositing retainage into escrow has an affirmative duty to provide written notice that includes the name of the financial institution, the account number, and the amount of retained funds deposited. This is a practical tool subcontractors should understand. If retainage has been withheld, a subcontractor may need to ask: Where is the retainage being held? Was a separate interest-bearing escrow account created? Who is the third-party escrow holder? What amount was deposited? Was written notice provided when retainage was withheld? If nobody can answer those questions, there may be a compliance issue worth investigating.

The $300-Per-Day Remedy for Escrow Violations

The Prompt Pay Act gives subcontractors another important protection. Under Tenn. Code Ann. § 66-34-104(c), if the party withholding retained funds fails to deposit those funds into the required escrow account, that party must pay the owner of the retained funds an additional $300 per day as damages for each day the retained funds are not deposited. The statute states that these amounts are damages, not a penalty. This can become significant very quickly. For example, if retainage is improperly withheld outside of escrow for 100 days, the statutory damages may total $30,000. If the violation continues for one year, the statutory damages may exceed $100,000. For many subcontractors, this remedy may become an important part of the overall payment dispute. It may also create leverage when the unpaid retainage itself is relatively modest but has been mishandled for a long period of time.

When Must Retainage Be Released?

Subcontractors often hear that retainage will be released “when the owner releases it.” That answer may not fully address the statutory requirements. Under Tenn. Code Ann. § 66-34-103(b), the owner must release and pay retainage to the prime contractor within ninety days after completion of the work or within ninety days after substantial completion of the project for completed work, whichever occurs first. Once the prime contractor receives retainage from the owner, the prime contractor must pay retainage owed to remote contractors within ten days after receipt. If a lower-tier subcontractor is owed retainage, the payment must continue downstream within ten days after receipt. This downstream payment requirement is critical. The statute is designed to prevent retainage from being released at the top of the project while remaining trapped in the middle of the payment chain. If the general contractor received retainage from the owner, a subcontractor should not automatically accept vague explanations for why payment has not been passed down.

The “Owner Hasn't Paid Us Yet” Problem

One of the most common explanations subcontractors hear is: “We have not been paid by the owner yet.” Sometimes that is true. Sometimes it is only partly true. Sometimes the general contractor has received partial payment but has not clearly explained what was paid, what was withheld, and why. The Prompt Pay Act makes it important to understand exactly where the money is. A subcontractor should try to determine whether the owner has paid the general contractor, whether retainage has been released upstream, whether the subcontractor's portion of payment was included in a pay application, whether the subcontractor's work has been accepted or approved, whether any specific backcharge, defect claim, or punch list issue is being asserted, and whether funds were withheld for a legitimate reason or simply delayed. The more specific the information, the stronger the subcontractor's position becomes.

Prompt Pay Act Rights and Mechanic's Lien Rights Are Different

The Prompt Pay Act is not the same thing as a mechanic's lien. A mechanic's lien is a statutory claim against improved real property. It can provide powerful leverage when payment has not been made. The Prompt Pay Act, by contrast, regulates payment obligations, retainage, escrow requirements, release deadlines, and remedies for improper withholding. These rights may overlap, but they are not identical. A subcontractor dealing with unpaid work should evaluate both Prompt Pay Act rights and mechanic's lien rights. Waiting too long can be dangerous because lien rights are governed by strict deadlines. A subcontractor should never assume that sending emails, making phone calls, or waiting for the general contractor to “work it out” will preserve all legal remedies.

What Subcontractors Should Do When Retainage Is Withheld

When retainage remains unpaid, subcontractors should begin with documentation. The subcontract should be reviewed carefully. Payment applications should be collected. Change orders should be organized. Emails and project correspondence should be preserved. The subcontractor should determine when its work was completed, whether the project reached substantial completion, whether retainage was released upstream, and whether escrow requirements were followed. Subcontractors should also consider asking for written confirmation regarding the retainage account. The request does not need to be aggressive. It can be simple: Please identify the escrow account where retainage withheld from our payments has been deposited, including the financial institution, account information, and amount deposited. If the response is unclear, incomplete, or ignored, that may become important later.

Common Mistakes Subcontractors Make

One of the biggest mistakes is waiting too long. Subcontractors often try to preserve relationships by being patient. That is understandable. Repeat business matters. But patience can become expensive when payment deadlines, lien deadlines, bond deadlines, or statutory rights are involved.

Another common mistake is relying on verbal promises. A project manager may say payment is coming next week. The accounting department may promise retainage will be released soon. The general contractor may say the owner is the only problem. Those statements may or may not be accurate. Subcontractors should document payment communications in writing.

A third common mistake is failing to ask whether retainage was properly escrowed. Many subcontractors never ask because they do not know the statute gives them a reason to ask.

A fourth mistake is failing to separate undisputed amounts from disputed amounts. If a small punch list issue exists, that does not always justify withholding all remaining payment. Subcontractors should identify what amount is actually disputed and what amount should be released.

What If the General Contractor Claims Defective Work?

Payment disputes often become more complicated when the general contractor alleges defective or incomplete work. Subcontractors should take those allegations seriously. A defect claim may affect payment rights, retainage release, backcharges, and litigation strategy. However, vague complaints should not automatically justify indefinite nonpayment. If defects are alleged, the subcontractor should ask for specifics. What work is allegedly defective? When was the issue discovered? Who identified it? What repair is being requested? What amount is being withheld? Is the withheld amount reasonably related to the alleged issue? The goal is to move the dispute from vague accusation to specific documentation. Specific disputes are easier to evaluate, negotiate, and resolve.

Can Prompt Pay Act Rights Be Waived?

The escrow requirements of Tenn. Code Ann. § 66-34-104 are mandatory and cannot be waived by contract. This is important for subcontractors because construction contracts often contain language that heavily favors the upstream party. A subcontractor should not assume that a contract provision eliminates statutory protections. Even when a subcontract contains broad payment language, retainage language, or waiver language, the Prompt Pay Act may still impose mandatory requirements. That is why statutory review matters.

Criminal Consequences for Retainage Violations

The Prompt Pay Act also contains criminal provisions. Certain failures to comply with retainage and escrow requirements may constitute a Class A misdemeanor under Tennessee law. The statute further provides that each day of noncompliance may constitute a separate violation in certain circumstances. For most subcontractors, the primary goal is not criminal enforcement. The primary goal is getting paid. However, these provisions show that Tennessee treats retainage compliance seriously. Retainage is not supposed to be held casually, indefinitely, or outside the statutory framework.

Practical Checklist for Subcontractors

When payment or retainage is delayed, subcontractors should ask: What does the subcontract say about payment and retainage? Was more than five percent retainage withheld? Has the subcontractor's scope of work been completed? Has the project reached substantial completion? Has the owner released payment or retainage to the general contractor? Was retainage placed in a separate interest-bearing escrow account? Was written escrow information provided? Are any defects, backcharges, or punch list items being asserted? Are mechanic's lien deadlines approaching? Are bond claim deadlines involved? Has the dispute been documented in writing? These questions help identify whether the dispute is only a contract issue or whether Prompt Pay Act remedies may also be available.

When a Subcontractor Should Contact a Construction Lawyer

A subcontractor should consider contacting counsel when a significant payment remains unpaid, retainage is being withheld without explanation, escrow information has not been provided, lien deadlines may be approaching, the general contractor claims it has not been paid, or defect allegations are being used to delay payment. Early legal advice does not always mean filing a lawsuit. Often, it means understanding the deadlines, preserving leverage, and communicating in a way that protects the subcontractor's rights. The earlier the issue is evaluated, the more options typically remain available.

The Bottom Line

The Tennessee Prompt Pay Act gives subcontractors important rights that many construction companies never use because they do not know those rights exist. The Act limits retainage, requires certain retained funds to be placed in escrow, recognizes that retained funds may be the property of the contractor or subcontractor owed the money, imposes deadlines for releasing retainage, creates downstream payment obligations, and provides significant damages when escrow requirements are ignored.

For subcontractors, this statute can be a powerful tool. When payment is delayed, the answer is not always to wait patiently and hope the money eventually arrives. The better approach is to understand where the money is, what the contract says, what the Prompt Pay Act requires, and what deadlines may affect recovery. Subcontractors who know their rights are in a much stronger position to protect their cash flow, preserve their claims, and get paid for the work they performed.

The Harrison Litigation Team represents subcontractors, trade contractors, suppliers, general contractors, and construction companies throughout Tennessee in matters involving unpaid invoices, retainage disputes, Prompt Pay Act claims, escrow violations, mechanic's liens, payment bond claims, construction litigation, and business disputes. If your company is dealing with unpaid work, withheld retainage, or a construction payment dispute, contact our office to discuss your legal options before important deadlines affect your rights.