Texas Retainage Caps on Public Work Contracts: What Gov't Code 2252.032 Actually Limits

A subcontractor on a Texas public job usually asks two questions: how much can the city, county, school district, or state agency hold back from every pay application, and when does it have to let go? The answer sits in Texas Government Code 2252.032, a different statute from the lien deadline most contractors already know.

//The Percentage Caps, By Contract Size

Section 2252.032(b) ties the cap to the total contract price, not to any single pay application. On a contract under $5 million, a governmental entity may not withhold more than 10 percent of the contract price as retainage, and no single bid-schedule line item may carry more than a 10 percent holdback either.

Once the contract reaches $5 million or more, the ceiling drops to 5 percent, with the same per-line-item limit. Dam construction and maintenance contracts stay at the 10 percent ceiling regardless of value — the statute carves that category out on its own.

//What a Prime Contractor Can Pass Down to a Subcontractor

Subsection (d) closes the obvious workaround: a prime contractor cannot withhold a higher retainage percentage from a subcontractor than the governmental entity is permitted to withhold from the prime. The same ceiling carries one tier further down, to a sub-subcontractor. If the entity is capped at 5 percent, nobody downstream can be held to more than 5 percent, whatever the subcontract itself says.

//When Retainage Has to Stop

Subsection (e) is the one worth underlining for anyone who has finished the work and is still waiting: a governmental entity may not keep withholding retainage once the prime contractor has completed its contractual work, and that includes the warranty period. Retainage also cannot be used to force rework on a manufactured product or system the contractor installed correctly, to the specification the project's own designer wrote.

//The Final-Payment Dispute Carve-Out

Subsections (f) and (g) give the entity one narrow exception: on an application for final payment, it may keep withholding retainage only over a bona fide dispute about noncompliant work, or because a surety won't agree to release, and it has to put the basis for that in writing to the prime contractor. Where there's no bona fide dispute and neither side is in default, the prime gets the chance to cure the defect or offer reasonable compensation instead — though the entity isn't required to accept that offer.

//Who 2252.032 Doesn't Reach

Section 2252.033 exempts three categories outright: contracts signed before August 31, 1981; any public works contract with an estimated total price under $400,000 at the time it was signed; and TxDOT contracts let under Transportation Code Chapter 223. A small school or municipal job under that $400,000 line sits outside this subchapter's retainage caps entirely, and the entity and contractor are negotiating retainage on their own terms.

It's also worth being precise about scope: 2252.032 governs public work contracts with a governmental entity. It has nothing to do with private commercial retainage, and nothing to do with the lien deadline that runs separately under the Property Code — those are different statutes with different clocks.

//A Worked Example

Take a $3.2 million wastewater line contract for a Texas municipal utility district — under the $5 million line, so the 10 percent cap applies. A subcontractor submits a pay application for $280,000 of May 2026 work. The prime can withhold up to $28,000 as retainage on that application, and no more, because the entity itself cannot be withheld more than 10 percent.

If that subcontractor's scope is substantially complete by September 2026, and the entity's own contract defines substantial completion at that point as required under subsection (a)(1), the retainage tied to that scope has to be released around then. It cannot ride along through a warranty period that runs on into 2027.

//If It Turns Into a Payment Fight

Retainage disputes on public jobs sometimes slide past the point where a straight contract claim is the only option. If a subcontractor is also unpaid on underlying private work and is weighing a lien instead, Texas runs that deadline on a different calendar — generally the 15th day of the third month after each month of unpaid work. Our Texas lien deadline calculator works that date out in English and Spanish; it's a calculation, not legal advice, and it doesn't substitute for reading the contract's own retainage-release clause.

//What We Couldn't Verify

The statute lets a governmental entity and prime contractor agree to put withheld retainage into an interest-bearing account on contracts of $10 million or more, or on contracts awarded without competitive bidding, but it doesn't set the interest rate — that's negotiated between the parties. We won't guess a number for it, and anyone budgeting around that interest should get the actual account terms in writing before relying on them.

If you want the retainage caps and release triggers for one of your own Texas public jobs laid out on a single page, email info@noumansadiq.com with the job's state and start date.