Retainage

What is Retainage?

Retainage, also called “retention,” is a term and practice commonly used in the construction industry, but not really anywhere else. Retainage is a percentage of the amount due for the labor or materials furnished to a construction project that is withheld and not paid out until the final completion of the work. Withholding a percentage of the contract price is a mechanism designed to ensure that the project is completed properly and to protect a contracting party from the inability or unwillingness of a party below them on the payment chain to remedy defective work, discharge liens, or otherwise comply with contractual requirements.

Retainage, according to some property owner and GC publications “gets the job done.” And, used fairly, that is true. By having an amount withheld after it is “earned” there is a sufficient urgency created to make sure the work is done correctly and mistakes are fixed. And, to the extent the work cannot be correctly accomplished or remedied, the money to fix it doesn’t have to be an “extra” spend. Just like many other mechanisms related to construction payment, however, the retainage scheme can be abused. Accordingly, rules, requirements, and practices have been built into federal law and the laws of many states, with respect to retainage to promote its fair use and to prevent its abuse. The amount of the contract price that can be withheld and the time for which the retainage may be withheld vary by state (and federally), and be dependent on project type.

Who needs to use Retainage?

In some circumstances, withholding retainage is required by state law. For example, Texas requires the property owner to retain 10% for all private projects. In most situations, though, retainage is not required but is allowed to a certain extent.

The use of retainage is a common practice in construction, but the final determination of whether or not retainage will be withheld often comes down to the contracting parties. It’s very common for contracts to use retainage to protect against non-compliance, and retainage is built into most general pay apps.

Retainage also has a “pass-through” effect, since a contractor or subcontractor who is having money withheld from them is likely to pass on that percentage (or, in some cases, a higher percentage) to the parties with whom they subcontract.

The determination of whether or not to withhold retainage can be negotiated through contract in some cases, and can depend on the reputation of the contracting party, the relationships between the parties, their respective leverage, and the existence and amount of retainage being withheld by parties higher up the payment chain.

In what circumstances is Retainage normally used?

As mentioned above, the use of retainage is standard in the construction industry, and in fact, is occasionally mandated. The use of retainage is common practice even when not specifically mandated, however, and is built into nearly every standard contract and pay application.

When a party is able to choose whether or not to use retainage as a protective mechanism, the factors can depend on, among other things, the reputation of the contracting party, the relationships between the parties, their respective leverage, and the existence and amount of retainage being withheld by parties higher up the payment chain.

Does Retainage change according to the project location?

Yes. Retainage requirements and limitations vary from state to state, and also if the project is a federal project. The amount of the contract price that can be withheld and the time for which the retainage may be withheld is dependent on the location of the project.

For more detailed information regarding the variances between states with respect to retainage rules and requirements, please see the 50-state breakout section.

Does Retainage change according to the project type?

Yes. Retainage requirements and limitations generally vary between private, public (state/municipal), and federal public projects. The amount of the contract price that can be withheld and the time for which the retainage may be withheld is generally dependent on the project type.

For more detailed information regarding the variances between states with respect to retainage rules and requirements, please see the 50-state breakout section.

What happens if I make a mistake with Retainage?

Making a mistake with retainage is a very broad category of possible problems. From a general standpoint, making a mistake with retainage is making a financial mistake – either with respect to accounts payable or accounts receivable. Making financial mistakes on construction is never good, and can cause significant impacts not only to the party making the mistake, but also to others throughout the payment chain.

Further, making mistakes with retainage that run afoul of the statutory requirements or regulations, can result in legal liability and penalties.

Is Retainage usually paired with anything else?

Retainage is one of the many construction payment regulation tools available or required for owners, contractors, subcontractors, and suppliers. Since using retainage, and passing it down the payment chain, is general practice for construction projects, it often appears alongside other contractual provisions or statutory payment requirements. Additionally, since retainage use is so commonplace, retainage amounts are built into nearly every standard pay app.