Although a controversial topic, retainage is commonplace in the construction industry. You can find retainage provisions in almost every modern construction contract. But at the end of the day, that’s money you’ve earned. So you need to be sure to properly account for retainage throughout the project on each pay application to ensure it’s eventually paid out.
This article will tell you everything you need to know about including retainage on your next construction payment application.
What is retainage in construction?
Retainage is an amount of money – typically a percentage of the contract amount – that the hiring party on a construction project withholds until to ensure that a contractor completes their work successfully. This percentage typically falls between 5% and 10%. Retainage may be fixed or variable. Fixed retainage is a set percentage that applies to the entire contract price. With variable retainage, the percentage changes. In some cases, it changes as work is completed – it may start at 10%, then reduce to 5% after the project is halfway done. The contract may also include different retainage rates for labor and materials.
Given the inherent risk of abusing this practice, many states heavily regulate how much retainage hiring parties can hold, and for how long.
How retainage is structured in a construction contract
Retainage can be structured in a few different ways, but there are two main categories; fixed/flat-rate and variable-rate retainage.
Flat-rate retainage is a fixed percentage of the contract price for the entire time of performance. Once the contractor has reached substantial completion, the owner or lender should release retainage funds.
Variable-rate retainage can mean one of two things:
- The percentage will reduce over time. This is, in fact, how many states regulate retainage. Let’s say the rate of retainage listed in the contract is 10%. Once the contractor has reached 50% completion of their contract, the percentage will be reduced to 5% for the remaining progress payments.
- The percentage applies to labor and materials differently. For example, retainage on labor may be 10%, and only 5% on materials. In other cases, retainage will only apply to labor and not materials, allowing the contractor to cover material costs in full.
To learn more about retainage, check out:
Accounting for retainage in payment applications
Payment applications are generally used on projects where the owner or lender issues progress payments. Fortunately, when retainage applies, they do not withhold it on the entire amount at the front of the project. Instead, the contractor applies the retainage percentage to the amount in each progress period. This may be the only way subcontractors can survive a construction project with retainage! If the hiring party withholds the full amount of retainage either at the very beginning or the very end of the project, it could be devastating to the subcontractor’s cash flow. If your contract includes either of these two scenarios, you have three options:
- Negotiate different retainage terms
- Make sure you have enough cash on hand to wait for payment
- Don’t accept the project
Since retainage is withheld from each progress payment, you’ll need to account for it in each payment application. That way you can ensure that you get paid all of what you’ve earned. Each pay application is different, but generally speaking, they follow the same basic principles. We’ll take a look at two of the more commonly used standardized pay applications as examples.
ConsensusDocs 710: Application for Payment
ConsensusDocs sells their own pay app, the 710 form. This is a common payment application in construction, popular with general contractors. This form takes a more bare-bones approach to pay applications. When it comes to accounting for retainage, the subcontractor fills out the percentage and amount in line 9 (Less Amount Retained). It provides a space to input the percentage withheld, which should be multiplied by the “Net Total to Date” in the line above.
For the sake of consistency, let’s go through another quick example, this time with fixed retainage.
Let’s assume the contract price is $20,000 and you’re submitting a pay app after completing 25% of the contract. So the amount you have earned in the pay period is $5,000, but retainage is 5%. The amount retained from the current progress payment is $250. Therefore the “Amount Due this Request” will be $4,750.
AIA G702-1992: Application for Payment
The American Institute of Architects (AIA) sells the popular AIA G702, which is probably the most commonly used standardized pay application in the construction industry. The form provides a full breakdown of the contract price, performance, change orders, and yes…retainage.
The contractor will put retainage in line 5 of the application for payment. This line has separate amounts for retainage on completed work, and retainage on stored materials (materials that you have purchased but not used in the project yet). That way the contractor can calculate the two separately in case they are working under variable retainage. The contractor should fill in the percentage and multiply it by the value of work or materials, respectively.
So let’s look at a simplified example. Your contract calls for variable retainage: 10% for labor and 5% for materials. The contract price is $100,000 and you’ve completed 25% of the project. Your current pay application is for $20,000 worth of labor and $5,000 of materials.
Multiply labor retainage (10%) by the application amount ($20k). Retainage for labor is $2,000. Multiply materials retainage (5%) by the amount stored ($5,000). Retainage for materials is $250.
The total amount of retainage on this application will be $2,250. Subtract retainage from the total application amount ($25k – $2,250). The current payment application should be requesting $22,750. (You’ll have to wait to get the remaining $2,250 back after the project.)
Other pay application forms
There are a variety of payment application forms out there. We even made a pay app form you can download for free. No matter which pay application document you use, make sure it has a field to account for retainage. This serves as a receipt to both you and the hiring party (either the general contractor or the property owner) for the amount of retainage due to you after the project.
Account for retainage in a continuation sheet
A continuation sheet is a schedule of values type document that is typically included with the AIA G702 pay application. This provides an itemized breakdown of all work and materials along with their estimated price or value. You can read our full guide on how to fill out the AIA G703 Continuation Sheet here.
The final column on the continuation sheet is reserved for retainage. However, contractors should only use this section if the contract allows you to calculate variable retainage on a line-item basis. That way you can calculate the amount of retainage being withheld from certain areas of the work. If the retainage is a fixed rate on the entire contract, then this section is unnecessary on the continuation sheet.
Account for retainage to track & recover payment
Filling out a pay application correctly and completely is important if you want to collect your payment. Pay applications aren’t exactly simple invoices; they can be a complex set of documents that provide an update on payments and contract progress. Retainage plays a big role in this – it’s money that you’ve earned but haven’t been paid.
Profit margins are thin in the construction industry. Failing to properly account for (or follow up to collect) 5-10% of the contract price can spell financial disaster. Next time you’re filling out a payment application, be sure to include and accurately calculate the retainage. Don’t leave it up to the GC or owner to fill out for you.