What are construction hold backs and how do they work with my general contractor?

“What are hold backs and how do they work with my general contractor?”

This is a common question I am asked by my perspective clients. Here is the answer;

What is a hold back?

A hold back is a percentage of money that you are billed that you do not have to pay right away. So if you get a bill for $1000.00 for electrical rough-in and your agreed hold back is 10% then you would write a check for $900.00. The $100.00 you didn’t pay is the hold back on the electrical rough-in. You paid the $900.00 because the electrical sub-trade gave your general contractor a bill for $1000.00, they submitted the bill because they have completed that portion of work. The general will take the $900.00 you paid for the electrical and pay the electrician. The electrician is still owed the $100.00 by you but knows they will have to wait to get it. The holdback is held by you the homeowner for 45 days and then the remaining balance is paid to the general contractor, the general contractor then pays the electrician. The percentage of holdback can vary depending on the deal you have made with your general contractor. 10% seems to be the overall standard when building a custom home.

The reason for the holdback is so that if the general contractor or the homeowner finds any issues with the work that has been completed then they are able to get the sub-trade to return and fix any problems or mistakes. Think of it as a guarantee that the work the sub-trade has completed is done the way it was specified by you and the general contractor and was completed in a legal and proper manner.
The sub-trades do not have to be completely finished to bill you, in large jobs there is multi billing cycles. For example; when the plumber has 50% of a large plumbing job complete they then will bill for the amount of work they have completed. This helps with their cash flow and helps them pay for the material that they have already purchased and installed.

Because you could end up with dozens of hold backs at any one time as your house is being constructed, your general contractor will separate them on your bill. This will help you understand at what stage each holdback is currently sitting and also what holdbacks are being released because the appropriate amount of time has passed.

Can I refuse to pay the holdback if there is warranty work to be done on my custom home?

The answer is no, no you cannot use warranty issues as an excuse to not pay the holdback. The reason that it is called warranty is because it is an agreement with the general contractor that certain things will be warranted. A warranty is only available to homeowners after you have paid all money’s owed to the general contractor. No general contractor will warranty a house when they are still owed money on it.

Because billing can be very complicated when you are having a custom home built, you need to make sure that you are hiring a general contractor that will give you bills that are broken down so that you as a laymen call read and understand it. You don’t want to have to hire an accountant just to understand your general contractor’s bill. You want to be able to quickly read the bill so that you can raise any issues with your contractor and then get on with paying the bill. A general contractor that takes the time to give you a properly worded and organized bill will make the building process easier for you the homeowner and them the builder.

Rob Abbott
Operations Manager
Village Builders Inc.