How a holdback clause protects you
Mike Holmes - Globe & Mail
What is the holdback?
The holdback is the last 10 per cent of the total value of the contract you "hold back" from the contractor after substantial completion of the job. Most homeowners think the holdback exists to make sure the contractor comes back to finish job. They are wrong.
The holdback exists to protect you from liens - by the contractor, his sub-trades or suppliers - against your property.
Most provinces in Canada provide contract law which says you have 45 days to pay the last 10 per cent of the contract price on your renovation, once you agree the work is substantially done.
Your contractor, or his sub-trades, have 45 days from substantial completion of your job to file a claim of lien against your property. You need to wait that 45 days for the time limit to expire before you fully pay out your contractor.
No, it's not "ransom" - you aren't withholding payment to make sure he doesn't place a lien your property.
The holdback is not your insurance that things will be done right - the payment schedule is. I don't know how many times I've told people to build the payment schedule on their job around benchmarks. Once the contractor reaches a certain stage of completion, you release more money.
If you are unhappy with the way the job is progressing, stop paying the general contractor until things get back on track. It doesn't matter what kind of contract you have with him, whether it is fixed-price, time and materials, or a project management contract.
The holdback is designed to protect the sub-trades who do the work from not getting ripped off by the contractor for the work they've done.
Sometimes a contractor will satisfy the terms of the contract, and the homeowners are happy with the finished job, but he will "forget" to pay his subs, and they are left holding the bag. Their only recourse is to place a lien on the house - your house - in an attempt to get from the homeowners what they are owed by the contractor.
No, it's not fair. But your house is where they've invested their labour and materials. They have a stake in it.
Remember, once you pay the general contractor, you have no way of knowing whether he has paid his trades or his suppliers. A sub-trade or supplier who hasn't been paid has the right to put a lien on your property during the 45 days after the job is substantially completed.
A lien means you can't sell your property until that lien has been paid. It's a legal claim against the value of your home. Even if you've paid the entire contract amount to the contractor, you are still liable to pay the liens out of your pocket.
Having money held back allows you to clear the lien with the money from the original contract.
HOLDBACK IS STANDARD
Until the time limit for filing a lien has passed, make sure you hold back the final payment. Wait 45 days, no matter how much you like your contractor, no matter how happy you are with the renovation, no matter how much you believe he'll be back to finish the job.
When you negotiate your contract with the contractor renovating or building your house, make sure a 10-per-cent holdback clause is included. This is a standard protection for you, the homeowner.
The holdback is an accepted practice and should be part of every agreement. You should never feel intimidated into excluding the holdback provision from your contract. If a contractor demands it be excluded, find a new contractor.