Retainage is a common payment tactic in the construction industry, where a portion of payment is essentially held hostage until the work is properly finished. Also called retention, it’s primarily used as a motivational tool to ensure that the contractor or subcontractor will satisfy their contract obligations.
But some predatory prime or general contractors use retainage as a weapon, tacking on back charges or other penalties to reduce the payment amount. It some cases, prime contractors try to withhold the entire amount of retainage. In this article, we’ll talk about steps a subcontractor can take on any project to get the GC to pay retainage back faster.
What is retainage?
Retainage is calculated as a percentage of the work value, usually around 5% to 10% of the contract price. It’s common in both private and public construction contracts.
Retainage is generally governed by the contract terms. Retainage provisions are typically included in the construction contract between the property owner and the general contractor (GC), and between the GC and the subcontractors. Generally, the owner or GC should release the retainage payment within a set period after your work is substantially complete. Unfortunately, this isn’t always the case.
The retainage struggle is real
The rise of retention in the construction industry causes significant cash flow problems for contractors. In the 2019 Construction Payment Survey Report, 57% of contractors said retainage is “always” or “sometimes” withheld. And their view of the practice isn’t very rosy. “Retainage in our industry is a way for companies to take an extra 10% off the top,” one respondent said. “They will make up reasons not to return it that have nothing to do with your company.”
Getting retainage back
If you’ve had trouble getting retainage back on previous construction projects, you’re not alone. We get questions like this about options for recovering retention quite frequently. That’s why we’re here. Keep reading for a series of steps you can take before, during, and after the project to make sure your payment rights.
If your project is already over, and you’re trying to figure out what you can do now to collect retainage, skip ahead to “After the project.” Then come back and read this article again before you start your next job.
Before the project: Research, negotiate and set expectations
Before any construction project begins, set expectations for the hiring party, as well as your own office manager or other staff.
Research your state retainage rules
Some states, like New Mexico, prohibit retention on subcontractors. Others, like Utah, limit retainage to 5% of the contract amount. However, most states don’t have set limits on how much retainage can be held, and for how long.
Choose your state from our retainage map to view more details about state requirements and limitations.
Negotiate better retainage terms
The contract defines retainage terms. If you’ve been burned by retention before, you might be hesitant to agree to it again. Fortunately, as with most contract provisions, it’s negotiable. Here are some starting points for negotiation.
You can ask for a retainage bond in place of retention. With this type of performance bond, the GC agrees to waive retainage if you pay the surety premiums. This generally only makes sense on a large project, if the bond premiums are significantly less than the retainage amount.
Alternatively, you can request variable retainage, with a reduced or zero rate once you’ve finished a certain portion of the project. In this scenario, you can theoretically get retainage back before you’ve finished the work. The GC could retain 10% of your progress payments until you are 50% complete, then reduce retention to 0.
Best case: Ask the GC or owner not to withhold anything. The strength of your argument here will depend on the level of experience and work history you can prove. The more trust you can build into the relationship at the beginning, the better your chance of winning agreement.
Establish a credit policy
Because slow or late payments are so common in construction, establishing a credit policy is important for any contractor. This policy outlines how you extend credit, how long you will extend it for, and the actions you will take to collect it. Provide your credit policy to the GC or project owner to set their expectations from the beginning.
If you’re not sure where to start, download this sample credit policy from Levelset for free.
Create a document retention strategy
When it comes to collecting construction payments, including retention, what matters isn’t the work you’ve done; it’s the work you can prove. A document retention strategy outlines how you will collect and maintain records on each project.
For retainage, this includes approved payment applications, change orders, continuation sheets, and any other document that shows the amount retained by the hiring party. Keeping these records while the project is ongoing will help you prove that you deserve that retainage payment if you have trouble collecting it later on.
Send preliminary notices
Send preliminary notices on every job. Preliminary notices let the property owner, lender, GC, and other parties up the payment chain know that you’re on the job. Sending notices shows that you’re organized, professional, and serious about the project. When it comes time to pay retainage, the paying parties are less likely to “forget” to pay you.
During the project: Exchange payment documents correctly
This seems like a no-brainer, but you’d be amazed at how often subcontractors submit incorrect, incomplete, or late documents. Payments flow much easier when people exchanged the correct paperwork, at the right time, with the right people.
First, review your contract to ensure you understand exactly what the GC or owner requires when you request payment.
Get changes approved in writing
If the owner or GC asks you to change the work in the contract, ask them to sign a change order. This serves as an official acknowledgement of the work they’re requesting and the cost associated with it. An approved change order ensures that another party can’t cite the change as evidence of defective work.
Without an approved change order, the GC or owner could dispute your work after the project. They may try to claim some of your retention as a back charge or other penalty.
Submit detailed payment applications
A thorough payment application can encourage the prime contractor to release retainage quickly at the end of the job. Your pay application should be as detailed as possible. Look at your contract to make sure you’re meeting or, better yet, exceeding the requirements. Include attachments that support your request for payment, like approved change orders, the schedule of values or continuation sheet, vendor invoices, etc.
Submitting a detailed pay app accomplishes two goals:
- It makes it easier for the owner or GC to review (and approve) your request.
- It serves as a record of both the payments you collect and the retainage you’re still waiting for.
Send conditional lien waivers
A lien waiver is essentially a receipt or a “proof of payment.” When contractors get paid, they sign waivers to acknowledge the payment amount and release their right to file a lien against that amount. It may go into effect the moment it is signed, or it may not be valid until the person signing actually gets paid – it depends on the type of waiver.
It’s also important to note that waivers can be for the final payment or just for partial payments. They are exchanged frequently on construction jobs, so it’s important to have a clear process for handling incoming and outgoing waivers.
Use software to track documents and payments
Unless you’re only working on one project at a time, it can be difficult to stay on top of all of the construction documents you send, and whether you’ve been paid. Software can help you send and track your payment progress on multiple jobs simultaneously.
Maybe you use an Excel spreadsheet and file folders to record the construction documents you submit and receive. Maybe you use a company like Levelset to send, manage, and track your payment documents. What matters most is that you find a process that ensures nothing is falling through the cracks, and follow it.
After the project: Request your retainage firmly
If you’ve followed all of the steps in this article before and during the project, then the GC or owner shouldn’t have any reason to delay the release of retainage. They know you’re serious about collecting what you’re due. They want to avoid a dispute that derails the project.
At this point, the best strategy to collect retainage is to communicate clearly, firmly, and often. Send an invoice, send invoice reminders, and protect your right to file a mechanics lien if they don’t pay the retainage.
Send a retainage invoice or application before the deadline
Once your contract work is substantially complete, the hiring party should pay your retainage according to the contract deadline. For example, the contract may give the GC 14 days from substantial completion to pay your retainage. Before the deadline arrives, send a payment application or invoice for the retainage. Don’t assume that the owner or GC will submit the retainage payment on their own.
Send an invoice reminder (or several)
If you’re still waiting after the deadline, be proactive. Make sure you communicate clearly and firmly about your intentions, so they don’t have any excuse.
Sending an invoice reminder can be enough to jog a payment loose from the GC or owner. They might not be as organized as you are, and your retainage payment may have gotten held up unintentionally. At the very least, an invoice reminder should spur them to communicate about why the payment is delayed.
Send a payment demand letter
Sending a payment demand letter can be an effective way to recover retainage. You can send a demand letter along with an invoice reminder (see above), with a notice of intent (see below), or by itself. It can be as friendly or as threatening as the situation calls for.
Take the time to ensure you’re sending it to the right person. Put it on professional letterhead. And write an effective demand letter that gets you paid.
Send a notice of intent (to lien)
If you’re still waiting for retainage past the contract deadline, send a notice of intent (NOI) to the GC, property owner, and/or lender. The parties at the top of the payment chain will do just about anything in their power to avoid a mechanics lien. Levelset data shows that more than 47% of NOIs are paid within 20 days of delivery. Levelset users with NOI policies see 90% of NOIs paid within 90 days.
As for the recommended timing to send an NOI, that will depend. If you’re in a state where an NOI is required in order to file a mechanics lien, send it within the state deadlines. If the state your project is in doesn’t require NOI for a lien filing, send one anyway.
File a mechanics lien
If there’s still no sign of your retainage, it may be time to use one of the most powerful tools in a contractor’s belt. At this point, consider filing a mechanics lien. Retainage represents an amount the GC owes you for work completed. So in most cases, you should be able to file a lien on that amount. Every state has their own guidelines and requirements to file a lien claim. Make sure you understand the rules where you live, and follow them closely.
Filing a mechanics lien to recover retainage can get tricky. In some states, the deadline for a subcontractor to file a mechanics lien may be shorter than the deadline for a GC to release retainage. The answer to this question in our Expert Center illustrates the dilemma. In Tennessee the deadline for any contractor to file a lien is within 90 days of last furnishing labor or materials to the project. The deadline for the owner to pay retainage to the GC is within 90 days of substantial completion. The GC then has 10 days to pay retainage to their subcontractors. So you can see how the subcontractor’s lien deadline could pass while they’re waiting for the GC to pay retainage.
Consider legal action
If the lien filing deadline has passed and retainage is nowhere in sight, it could be helpful to consult with a construction attorney. A law firm that specializes in construction issues can help you assess what options are on the table, and whether it’s worth legal action.