The Money You Hold Back | Holdback Account
The Holdback Account
Retaining the holdback is one obligation. Putting it somewhere it cannot be spent is a second one, and section 5 is specific about where that is.
A separate account, not a bookkeeping entry
Section 5 of the Act deals with the holdback account. The point of it is that the retained 10% is identifiable money sitting in a savings institution, rather than a number in a ledger while the cash is used for something else.
This matters most when the party holding the money runs into trouble. A holdback recorded only as an accounting entry inside a general operating account is indistinguishable from working capital, and it disappears with everything else if that account is drained or frozen.
On a small multiplex the practical version of this is a separate account, in writing, with the holdback deposited on each draw rather than reconciled at the end.
Why the builder's operating account is the wrong home
An owner who leaves the holdback with the general contractor to administer has handed the protective fund to the party most likely to be the subject of a claim against it.
The scenario this guards against is ordinary. A general contractor falls behind, uses the holdback to cover payroll on another job, and a subcontractor on your project goes unpaid and files. The fund that was supposed to answer that claim was spent months ago.
Where the money is held jointly or by an independent party, the amount is available on the day the holdback period expires and the release is a clerical step rather than a negotiation.
Section 10 and the trust obligation
Separately from the holdback account, section 10 provides that money received by a contractor or subcontractor on account of the contract price constitutes a trust fund for the benefit of those they engaged.
That trust obligation runs alongside the holdback. A general contractor who receives draw money and does not pay the trades who earned it is dealing with trust money, and the consequences of that are more serious than an ordinary contract breach.
For an owner the useful implication is that asking where draw money went is a legitimate question with a statutory backdrop, not an accusation.
Best For
- ✓ Builds where the owner and contractor are separate parties
- ✓ Projects funded by construction draws through a lender
- ✓ Any arrangement where the contractor also administers payments
Usually Fails When
- ✕ The holdback stays in the builder's general operating account
- ✕ The holdback exists only as a line in a spreadsheet
- ✕ Nobody can say which account the retained money is actually in
What To Verify Before Spending Money
- → That the holdback sits in an identifiable account at a savings institution
- → That the deposit happens on each draw rather than at the end
- → That you can produce a statement showing the balance on request
Frequently asked questions
What is a holdback account under the BC Builders Lien Act?
A holdback account is the account in a savings institution where the retained 10% is held, dealt with in section 5 of the Builders Lien Act. The purpose is that the holdback exists as identifiable money rather than as a bookkeeping entry, so the fund is actually available to answer a claim when the holdback period expires.
Can the contractor hold the builders lien holdback?
Leaving the holdback in the general contractor's operating account puts the protective fund in the hands of the party most likely to face a claim against it. If that contractor spends the money on another project and a subcontractor on yours goes unpaid, the fund that was meant to answer the claim is gone. A separate or independently held account avoids that.
Does the holdback have to be in a separate bank account?
Section 5 of the Builders Lien Act addresses the holdback account and its purpose is that the money is identifiable in a savings institution rather than mixed into general working capital. Because the requirements turn on the structure of your contract and who is paying whom, confirm the arrangement with a BC construction lawyer before your first draw.
What is the trust fund provision in section 10?
Section 10 of the Builders Lien Act provides that money received by a contractor or subcontractor on account of the contract price constitutes a trust fund for the benefit of those they engaged. A contractor who takes draw money and does not pay the trades who earned it is dealing with trust money, which carries more serious consequences than a plain contract breach.
Who should sign on the holdback account?
The safest arrangement on a small build is one where the contractor cannot move the holdback alone, whether through a joint signing requirement or an independent party holding the funds. That way the money is available as a clerical step when the holdback period expires rather than becoming a negotiation with a contractor who has already spent it.
When does money go into the holdback account?
The holdback should be deposited on each progress draw, at the same time the rest of the payment is released. Reconciling it once at the end of the project defeats the purpose, because the fund is meant to exist throughout construction, which is exactly when a contractor is most likely to run short and a trade is most likely to go unpaid.
Can I ask my contractor where the draw money went?
Yes, and section 10 of the Builders Lien Act gives that question a statutory backdrop. Because money received on account of the contract price is trust money for the benefit of those the contractor engaged, asking whether the trades on your project have been paid is a reasonable enquiry rather than an accusation of wrongdoing.
What happens to the holdback account if the contractor goes bankrupt?
Money properly held as a holdback and as trust funds under section 10 stands differently from the contractor's general assets, which is the reason the Act separates it in the first place. Where the holdback was left in a general operating account and spent, there may be nothing left to recover, so get advice from an insolvency lawyer immediately.
Official Sources Referenced
See What Your Lot Can Build
Enter any BC address to see how many units the zoning allows and what the build looks like before you sign a construction contract.