Retainage in Construction Contracts: What It Is and How to Manage It
Retainage is one of the oldest practices in construction and one of the most consistent sources of cash flow problems for trade contractors. You do the work, you invoice for it, and the owner holds back a percentage for months or years. Understanding the rules helps you manage it.
Before you price
What retainage is
Retainage is a percentage of each progress payment that the owner withholds until the project reaches a defined completion milestone. The held money is the owner's security that the contractor will finish the job.
A typical retainage rate is 10 percent. Some contracts start at 10 percent and reduce to 5 percent after the project is 50 percent complete. Some start at 5 percent. Some are higher.
If you invoice $100,000 in work and the contract holds 10 percent retainage, you receive $90,000 now and $10,000 later. Do that every month for a year and the owner is holding more than a month of your revenue.
When retainage gets released
Most contracts release retainage at substantial completion or final completion. The definition of those terms matters.
Substantial completion is typically when the work is complete enough for the owner to use the space for its intended purpose, with only minor punchlist items remaining. Final completion is when every last punchlist item is resolved and all closeout documents are submitted.
Some contracts hold retainage until final completion and require all subcontractors to be paid in full before releasing anything. A slow sub who fights the punchlist can hold up retainage for the whole project.
Read your contract to find out exactly when retainage is released and what conditions must be met. It should not be a surprise at the end of the job.
Retainage on subcontracts
If you are a subcontractor, the GC almost certainly holds retainage from you at whatever rate the owner holds from the GC. Sometimes the GC holds more from subs than the owner holds from them.
Check your subcontract carefully. If the owner holds 5 percent and the GC holds 10 percent from you, you are carrying more risk than the GC for no extra compensation.
Some states have laws that limit the retainage a GC can hold from a sub to the same rate the owner holds from the GC. Know your state's rules.
How to price retainage into your bid
Retainage is a cost of financing. The money the owner holds is money you cannot use to pay your crew, your suppliers, or your overhead. If you borrow to cover that gap, the interest is a real cost.
On a long job with 10 percent retainage, calculate how much money you expect to have tied up in retainage at peak exposure. If that number is significant relative to your working capital, factor a financing cost into your bid.
Some contractors explicitly add a retainage recovery line to their bids. Others build it into overhead. Either way, it needs to be in the number.
What to do when retainage is not released
The most common retainage dispute: the contractor finishes the work, the punchlist drags on, and the owner finds reasons not to sign off on final completion.
Document your work at substantial completion. Get a written acknowledgement of what is and is not on the punchlist. Complete the punchlist items promptly. Submit closeout documents as required.
If the owner continues to withhold retainage after you have met the contract's completion conditions, consult a construction attorney. Many states have prompt payment laws that impose interest penalties on late retainage payments. Your lien rights may also apply.