Most AV professionals I know don’t think of AV as being the “construction industry.” While I can entertain arguments for fitting it under that umbrella, if anything, the AV business is “construction-adjacent.”
It’s that adjacency that means that AV pros need to understand liens and holdbacks since they’re a reality of doing business. How holdbacks are structured vary and are often based on the context of whether the overall project is a renovation or new construction. In general, a holdback is a percentage of the total cost of the contract that is kept unpaid until specified conditions are met, what is often called “substantial completion.”
The exact legal terms that define holdbacks vary from one municipality to another — it would be wise to learn yours — but they’re broadly similar. They specify a total amount (ten percent is not unusual) that remains in escrow until after completion. Holdbacks are intended to fulfill two goals. The first is to ensure the client’s satisfaction with the work that’s been done. The other (arguably more important) is to protect the client from liens against them and their property for unpaid bills by the primary contractor, subcontractors or suppliers. Completion holdbacks focused on client satisfaction run through the general contractor. If the client is dealing directly with you, there are terms in the contract you’ve agreed on. In either instance, whether the AV pro is dealing with the general contractor or the client, it’s imperative to have clear terms in the contract on what constitutes substantial completion.
At the risk of sounding sarcastic, the best way to ensure your firm receives its holdback funds is to finish the job, but it’s not always that simple.
Your contract has to specify exactly what substantial completion entails. Because AV systems are complex, some aftercare and fine-tuning is not unusual. In fact, most of that should fall under the warranty or service contract you offer. But to be substantially completed, the system needs to function as laid out in the scope of work document, and the contract should say so. Otherwise, you risk getting bogged down forever ironing out minor details after the fact.
With regard to receiving payment from the general contractor, holdbacks provide security for contractors and subcontractors who supply labor and materials to a project. It also limits the liability of owners who have hired and paid a general contractor against liens filed by their subs.
I know you may find this hard to believe, but sometimes general contractors “forget” to pay their subs for the work they did on a project. I know, it sounds crazy! If your company is in that position, for whatever reason, often the only recourse you have to collect is to place a lien on the property.
Again, this will vary, but many municipalities specify a 45-day waiting period before the client pays the final holdback. At the same time, if they haven’t been paid, affected parties have 45 days to file a lien. The holdback is the client’s protection against subcontractors or suppliers placing a lien on the property. It puts the onus on the primary contractor to ensure that all the subs and suppliers have been paid.
If you’re lucky you may never have to deal with this in your entire career. But if you’re unlucky, it can be an enormous hassle. So since it’s better to be proactive rather than reactive, take the time to understand the rules in your area so that you’re prepared if you ever have an issue.