Retainage

How retainage works

Retainage is calculated on each progress payment, but it builds up across the job. On every pay request, the client works out the value of work completed to date, holds back the contract’s retainage rate on that value, and subtracts what it has already paid. The amount held grows with each billing until it’s released at the end.

The contract sets the rate and the release terms. Rates often fall between 5% and 10%. Retainage is usually calculated on work completed and on stored materials if those are billed. It can apply to the whole contract or be reduced once the work reaches a milestone, often half complete.

Retainage usually flows down the chain. The owner holds it from the general contractor, and the general contractor holds it from each sub, often at the same rate. A subcontract may say the sub’s retainage is released only when the general contractor gets its own retainage back, which can mean a sub that finished early waits until the whole job closes.

Release usually happens in one of two steps. Part or most of it may be released at substantial completion, with an amount kept to cover the punch list. The rest follows final completion, once the closeout package is in:

• Punch list items finished and accepted.
• Closeout documents delivered, such as warranties, manuals and as-built drawings.
• Final lien waivers from the contractor and its subs and suppliers.
• On bonded jobs, the surety’s written consent to final payment.

Retainage terms you’ll see in contracts

Contracts handle retainage in a few common ways, and the details change how much cash you wait for and for how long.

Many states cap retainage on public work, and some cap it on private work too. Many also set deadlines for releasing it and, in some cases, interest on retainage paid late. The rules differ by state and between public and private projects, so check your state’s prompt payment and retainage laws.

Why retainage matters to each party

For contractors and subs

Retainage is earned money you can’t use yet. On a thin-margin job, the amount held can be larger than your whole profit, which means you may be financing the job until closeout. Price that wait into your bid, and treat closeout paperwork as part of the job, not an afterthought.

For owners and clients

Retainage gives the owner leverage to get the punch list finished and the closeout documents delivered. It is also a cushion if the contractor walks away or a sub files a lien. Holding more than the contract allows, or holding it long after completion, can break state prompt payment rules.

For general contractors

A general contractor is both holding retainage and waiting for it. Tracking what’s held from each sub against what the owner is holding avoids paying out retainage you haven’t received, or sitting on a sub’s retainage after the owner has released yours.

How to manage retainage step by step

1. Before signing, read the retainage clause: the rate, any reduction point, release conditions and how it passes down to subs.
2. Check your state’s retainage and prompt payment rules for the job type, public or private, and compare them with the contract.
3. Show retainage on every invoice or pay application as its own line: work completed to date, retainage held and amount due now.
4. Track retainage held per job as a receivable, with a running total.
5. Request any reduction in writing as soon as the job reaches the milestone in the contract.
6. Start the closeout package early: warranties, manuals, as-builts and waivers from your subs and suppliers.
7. Request release in writing at substantial completion and again at final completion, and follow up on the dates the contract or state law sets.

The contractors who get retainage back fastest are usually the ones who treat closeout as a scheduled task with its own deadline. A finished job with missing paperwork can hold retainage for months.

Retainage example with numbers

Say a general contractor has a $240,000 tenant improvement contract with 10% retainage. For illustration, the contract says no further retainage is held on work done after the job is 50% complete. The contractor bills monthly on work completed to date.

Each payment is completed to date, less retainage held, less what was paid before. In month 3, that is $192,000 − $12,000 − $108,000 = $72,000. Retainage stops growing at $12,000 because the contract stops holding it after 50% complete.

The five payments add up to $240,000: $54,000 + $54,000 + $72,000 + $48,000 + $12,000. Without the reduction, retainage would have reached $24,000, 10% of the full contract, all waiting on closeout.

The same terms usually flow down. If the general contractor has an $80,000 drywall subcontract with matching retainage terms, the most it can hold from that sub is 10% of the first $40,000 of work, or $4,000. If the sub finishes in month 3 but its retainage is only released when the owner releases the general contractor’s, the sub waits on everyone else’s closeout too.

Common retainage mistakes

• Not pricing the cost of waiting for retainage into the bid on long jobs.
• Leaving retainage off invoices, so the client’s records and yours disagree about what’s owed.
• Forgetting to request a reduction the contract allows.
• Signing a final lien waiver before retainage has actually been paid.
• Letting closeout documents slide after the crew leaves, which delays release.
• Accepting a subcontract that ties release to the whole project’s closeout without knowing how long that could take.
• Writing off retainage that’s owed instead of following up in writing.

Retainage is easy to lose track of because it shows up months after the work. Keep a running list of every job with retainage outstanding and the date you can next ask for it.