4.4 The Tennessee Prompt Pay Act and Retainage Escrow Mandates

The Tennessee Prompt Pay Act, T.C.A. Title 66, Chapter 34, separates progress payments, retainage, escrow, notice before remedies, and exceptions. These are different clocks. A contractor should keep a payment log showing the application date, receipt, disputed items, upstream payment, retainage, and statutory notice. Applying a deadline without identifying the event that starts it is a common way to produce the wrong answer.

Progress Payments Through the Contract Chain

Under § 66-34-202, an owner must pay a contractor within 30 days after a timely payment application, provided the contractor has performed in accordance with the written contract. The application must meet the agreement’s requirements; merely mailing an unsupported invoice does not establish that all conditions have been satisfied. Legitimate disputes and statutory withholding rights must be distinguished from an unexplained refusal to pay. A shorter contractual payment period should be honored.

Under § 66-34-302, a contractor must pay downstream subcontractors, materialmen, and furnishers within 10 days after receiving the corresponding payment, subject to the Act’s conditions and permitted withholding. The downstream clock starts with receipt of upstream funds, rather than the subcontractor’s invoice date. A pay-when-paid clause should not be confused with an unconditional waiver of statutory rights. A contractor reviewing an unpaid account should identify whether the owner has not paid, whether the prime has received the money, and whether the claimed work is genuinely disputed.

Example: A compliant application is received October 1. Count the owner’s 30-day payment window from that event under the applicable time-computation rules. If the prime receives the corresponding payment October 20, the downstream 10-day clock uses October 20. Do not automatically give the prime another 30 days. Retainage released with that payment must also be tracked separately.

Retainage Cap and Release

§ 66-34-103(a) allows retainage on public and private construction contracts, but caps it at 5% of the contract amount. The cap applies throughout the chain. Retainage secures completion; it is not an unrestricted cash reserve or an excuse to withhold unrelated disputed charges. An agreement attempting to waive the Act is ineffective under § 66-34-701.

Under § 66-34-103(b), the owner releases retainage for work completed within 90 days after completion of the work, or 90 days after substantial completion of the project for work completed, whichever occurs first. “Work completed” means completion of the retained party’s contracted scope and satisfaction of the contract’s terms and conditions. The contractor then pays its subcontractors within 10 days of receiving retainage, and subcontractors pass it down within ten days of receipt. Both the 90-day owner rule and ten-day downstream rule are in subsection (b). Owner occupancy or use is not a separate statutory alternative trigger in that subsection.

A superintendent should therefore document two milestones: completion of the relevant scope and substantial completion of the project. A contractor whose work remains incomplete cannot simply cite another contractor’s completion certificate. Conversely, a completed trade should not assume every downstream payment can be delayed indefinitely until all unrelated project closeout work ends.

Separate Interest-Bearing Escrow

Under § 66-34-104, when the prime contract is $500,000 or more and retainage is withheld, retainage must be held in a separate, interest-bearing escrow account with a third-party financial institution. The trigger uses the prime contract amount, not the size of each subcontract. On a $900,000 prime contract, a $60,000 subcontract remains within the escrow framework even though that subcontract is below $500,000. If no retainage is withheld, there is no retained balance to escrow.

The retained money becomes the separate property of the party entitled to it when withheld, subject to statutory conditions. It does not become the withholding party’s unrestricted working capital while awaiting deposit. The funds and accrued interest are payable as required upon satisfactory completion. Under § 66-34-104(d), the withholding party gives written notice identifying the institution, account, and retained amount when first withholding and with each payment application thereafter. The Act avoids requiring duplicative escrow deposits by remote contractors where the retained funds are already held upstream as described in § 66-34-103(d).

Damages and Enforcement Conditions

§ 66-34-104(c) imposes $300 per day in damages, expressly not a penalty, for the period covered retainage is not deposited as required. The period begins when funds are first withheld and ends when properly escrowed or paid. The daily amount is not multiplied by the retained percentage, and a small retained balance does not make the duty disappear. Government entities are exempt from subsections (c), (d), and (j); other provisions of the Act still need separate analysis. § 66-34-703 also contains particular financial-institution and project exceptions. Do not teach the daily damages or criminal provisions as applying identically to every public owner or lending institution.

Criminal liability is a separate issue. § 66-34-104(j) addresses failure to deposit retainage within seven days after receipt of written notice of the escrow failure and specifies a Class A misdemeanor. It is inaccurate to label every initial escrow omission an immediate criminal conviction. § 66-34-103(e) separately provides an enforcement mechanism for violations of § 103, including statutory fines subject to its conditions. Civil damages, criminal charges, and disputed contract balances are distinct consequences.

Worked private-project example: A developer’s prime contract is $1,400,000. The first $300,000 payment has 5% retainage, or $15,000. Assume the developer is subject to § 104(c), withholds that amount outside the required escrow for exactly 75 countable days, and then makes a compliant deposit. Daily statutory damages are $75\times300=22500$, or $22,500. Those damages are separate from the $15,000 retained principal and applicable interest. Criminal liability would require its own statutory notice and proof. A 10% retainage clause would also exceed the 5% cap.

Notice Before Stopping Work or Seeking Relief

§ 66-34-602 establishes a notice procedure. The unpaid claimant sends the required written notice by registered or certified mail, return receipt requested, identifying the failure to pay and intention to use the Act’s remedies. The recipient has 10 calendar days after receipt to pay or provide adequate legal reasons for nonpayment. A contractor cannot assume that any unanswered invoice is already the statutory demand.

If payment or an adequate legal response is not provided, and the claimant is not otherwise in default under the contract, the claimant may use the authorized stop-work and court remedies. The statute permits an extension equal to the period of stopped work; demobilization, remobilization, or other damages require their own contractual or legal basis. Injunctive relief and bond requirements are governed by the section. Attorney’s fees are not automatically payable on every late invoice: the statute permits an award against a nonprevailing party acting in bad faith.

A practical checklist is to confirm performance and the amount due, identify the upstream receipt date, preserve payment applications and notices, use the correct delivery method, document receipt, allow the statutory response period, and then evaluate remedies. Prompt Pay notices do not replace mechanics’ lien notices or extend lien deadlines. The two systems may operate on the same debt while requiring different recipients, forms, and triggering events.

Source check (October 13, 2026): Tennessee enacted Prompt Pay amendments, SB2681 (2020).