What is retainage? Everything a contractor needs to know

retainage in construction

The same is true for those that have done work for a client before. Likewise, new contractors or those with a poor work history often find their projects have higher rates and retainage lengths. There are many advantages to the practice of retainage that contribute to cultivating more efficiency and transparency across the construction business, from all stakeholders.

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retainage in construction

Say a general contractor has billed its customer $100,000 for a project. With 5% retention the contractor will receive a payment of $95,000. The balanceis tracked until the final payment is made once the work is complete. It is usually calculated as a percentage of each payment, usually 5 or 10%. For example, in Oregon the limit is 5% and in New Mexico retainageis not allowed. Generally, withholding retention flows down through a project’s contracts.

Empire State Subcontractor’s Association

  • Retainage, sometimes known as “retention,” is the payment amount withheld from contractors and subcontractors until the construction project’s end.
  • Make sure you know the guidelines in your state that govern retainage in relation to liens, and don’t forget to take the necessary step of filing a preliminary notice to secure your lien rights.
  • If a general contractor defaults, retainage offers a quick source of funds the owner can draw upon to remedy the situation, from securing another GC to finish the work, to paying subcontractors and suppliers.
  • PandaDoc is not a law firm, or a substitute for an attorney or law firm.
  • However, many of these inexperienced companies were unable to work to the required standards, which led to a high number of insolvencies.
  • Before the construction contract is finalized and a job begins, every party should be clear on the details and expectations related to retainage.
  • However, retainage isn’t always seen as a positive feature of construction.

Though indirectly, construction project management software can help secure your retainage fee. With detailed and up-to-date contract records stored in one place, you have all the necessary information at hand when it comes to filing a lien or bond claim. There is a retention clause in construction contracts that describes the amount that is retained, along with when and how will this withheld amount be paid back to the contractor.

  • But, there are different rules depending on the location and project type.
  • A satisfied contract, however, doesn’t mean retained money will hit your bank account as soon as the project ends.
  • With variable retainage, the percentage can change based on the stage of project completion.
  • Retainage has a long history in the industry and can apply to both general and subcontractors.
  • Still, while retainage might be a given in most jobs, that doesn’t mean it has to hurt you.

Brush up on retainage laws.

The best way to deal with retainage is to acknowledge how it affects your cash flow and plan proactively. This means implementing good accounting practices and having access to working capital that can float projects until they’re finished. Clients can and have used retainage tactics to avoid making payments. They must state a release of retainage at specific milestones and they must list the penalties for not doing so. When used correctly, retainage protects clients and provides a financial incentive for contractors. For public projects, the retainage percentage usually ranges between 5% and 10%.

As they wait to receive their full fees for one project, they still must pay their employees their full wages, make insurance payments, buy supplies and equipment and finance new projects. Overcoming cash flow concerns can be a major hurdle, especially for small businesses. And tight cash flow can lead to tensions in business relationships and dealings. From an owner’s perspective, retainage in construction serves as a form of security against potential risks such as contractor default or incomplete work. Meanwhile, contractors can fairly argue that retainage poses a significant financial burden and cash flow issues for them.

How much money can be withheld for retainage?

It also stores every interaction between you and suppliers by having purchase orders and bills recorded in one place and tracks when bills are due so nothing is missed. We’re building innovative technologies that simplify preconstruction for everyone. Here are some forms and legal notices you may need to stay ahead on retainage. While retainage has advantages, the practice is not without its challenges.

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  • While highly divisive, retainage remains a construction industry standard.
  • They also reduce risk for primary contractors who rely on subcontractors and suppliers.
  • This is an important distinction that contractors should keep in mind to avoid cash flow issues during the project.
  • What’s worse is that subs may never receive their retention payments if the owner or GC goes bankrupt or out of business.
  • The same is true for those that have done work for a client before.

Yes, this will increase the contract amount for your clients, but it is an excellent approach to make sure you have enough money to work with. In some situations, this may persuade clients to forego the retainer entirely. Subcontractors face more difficulties with retention than contractors. They are virtually always only available for certain aspects of a project. With PandaDoc contract management software, adding a retention clause to your contract is easy.

retainage in construction

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Remember that in Texas, owners must hold retainage funds in an interest account. This kind of information can be invaluable in the event that funds are mishandled. As a contractor, your critical retainage in construction task is ensuring that retainage is held back on each progress payment. If you choose to use payment applications than they must clearly reflect the correct retainage amount withheld.

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A construction project’s retainage is set by the construction contract between the parties, in which both sides agree to some percentage withheld from each progress payment. As a subcontractor, you probably already grapple with fronting the needs of projects, including materials, equipment and skilled labor, in the face of notoriously delayed payment cycles. If retainage is withheld for months or even years after work on a project is completed, you’ll be forced to find other means of financing projects while you wait to recoup the retainage. The concept of retainage was first introduced nearly two hundred years ago as an economic incentive to ensure contractors would perform quality work and successfully complete their projects.