Withholding Construction Payments Due to Poor Workmanship May Be Illegal

Withholding funds in excess of the cost of repairs is “unlawful,” court concludes.

Many churches have withheld the final payment under a construction contract as “leverage” to force a contractor to correct defective or poor workmanship. But depending on the amount withheld, such a practice may be inappropriate.

This is what a Mississippi court concluded in a recent case. An electrical contractor entered into a contract with a church to do the electrical wiring for a new building. The church paid part of the contract price, but when the building was inspected by a bank appraiser the electrical work was found to be substandard.

The pastor and building committee were advised to withhold the balance until repairs were completed. The court noted that when a contractor substantially performs the terms of a construction contract, it is entitled to payment of the contract price less the cost that is required “to bring the building up to the specifications of the contract between the parties.”

In this case, the amount of the contract price that the church was withholding was far in excess of the amount that it spent to hire another electrical contractor to repair the work. Therefore, allowing it to withhold the entire balance “would constitute an unlawful and unjust enrichment of [the church].” Sumrall Church of the Lord Jesus Christ v. Johnson, 757 So.2d 311 (Miss. App. 2000).

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
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