Retainage Guide
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What is Retainage?

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Retainage, also called “retention,” is an amount of money “held back” from a contractor or subcontractor during the term of a construction project.

In theory, this money is held back to assure that the contractor or subcontractor finishes work completely and correctly, and does not otherwise cause problems to the job (i.e. does not pay a sub-tier contractor, resulting in a mechanics lien). However, the practice is very controversial, and many argue that it compounds the construction industry’s working capital and cash flow challenges, thus creating more problems than it solves (see the 2019 Construction Payments Report).

This unique construction practice creates a lot of cash pains, strains relationships, leads to abuses, and can be confusing.

What Is The Retainage On Your Job?

So, how much money will be withheld from a contractor on your job?  Or how much should be withheld?

A construction project’s retainage is determined by the construction contract between the parties, where the parties will agree to withhold $0 withholdings, or to some percentage (usually, 5% or 10%).  Some states regulate how much can be withheld from contractors, and other states don’t.  Some states have vague regulations, such as requiring that withholdings be “reasonable.”  You need to consult the rules in your state — take a look at the Retainage Map on this page to see what the rules are in your state.

Typically, withholding amounts in a construction contract that violate state-imposed limits will be rendered invalid!

Creates Cash Pains in Cash-Strapped Industry

Construction industry margins are not extremely attractive. In many cases, contractors work on margins as little as 3-10%.  Just check out George Hedley’s excellent article on Construction Business Owner, “9 Numbers You Need to Keep Your Company Profitable,” where he references a CFMA survey showing “the average pre-tax net profit for general contractors is between 1.4 and 2.4 percent and for subcontractors between 2.2 to 3.5 percent.”

Hedley explains that “[t]his is not enough profit to compensate the risk contractors take.” But even more alarming is how difficult this makes cash management.

Most construction contracts require 5-10% withheld from subcontractors and contractors. As you can see, this is less than a contractor’s net profit margin.

Watch out for abuses

Unfortunately, it’s common for contractors and developers to abuse the retention practice in construction.  This is done in two ways:

First, it’s abused to “stay ahead.”  It’s a common construction practice to underpay a contractor for work done on a job. If, for example, 30% of work is completed, the developer or GC will only pay 25% of the price.  And then, also take out a withholding.  This is done to “stay ahead” of the subcontractor, to further protect the owner or GC.  This is an abusive practice.  You should check out the payment reputation and practices of your contractor to see whether anyone reports them engaging in this abusive practice.

Second, it’s abused by holding money too long or withholding high percentages. It’s common for contractors to have high amounts withheld from them (even when it’s limited!), and to have that money withheld for a very long time. Sometimes, contractors must have to make formal demands for retainage.

And there are other ways to abuse this practice, too. Take a look, for example, at this situation addressed in our Expert Center, where a GC tried to move retained money from one project to another, like some kind of evergreen deposit from a subcontractor!

Just like many other mechanisms related to construction payment, 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.

Frequently Asked Questions about Retainage

Retainage can be confusing. This is especially true because the rules are very specific and vary from state-to-state and job-to-job. It's important to pay close attention to the requirements and rules. Small mistakes can put your company at risk for withholding money improperly, or for losing out on being able to ever get your withheld funds! These frequently asked questions address common issues that you'll encounter when trying to stay ahead with the game.

Who needs to or can use Retainage?

In some rare circumstances, withholding money from contractors is actually required by state law. For example, Texas requires the property owner to retain 10% for all private projects. In other cases, such as in New Mexico, it's prohibited.

These are the extreme examples, though. In most situations, retainage is not required but is allowed. And when it is allowed, it's typically regulated or limited.

Ultimately, whether or not retainage will be withheld often comes down to the contracting parties. It’s very common for construction contracts to require money withheld throughout a job to protect against non-compliance, non-performance, and other project risks. The withholding practice is so common, in fact, calculating withholdings is built right into most standard payment application forms.

Retention withholdings also have 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 money from a contractor 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 being withheld by parties higher up the payment chain.

How much money is typically withheld from a contractor?

Generally speaking, when it comes to withholding money from contractors on jobs, there's a lot of variety.

The short answer is that you most typically see retainage set as either 0%, 5%, or 10%.

0%: Rare to see when working with subcontractors, and generally pretty rare.

5%: Very common (especially on state jobs)

10%: Very commonly withheld from subcontractors, and otherwise, common

>10%: rare

There was a great study done by the American Subcontractor Association that surveyed retainage practices across the country. It's pretty dense, but interesting. Here is an excerpt from that report showing the allocation of withholdings across different project types:

Retained %% @ Comp.FedStatePrivate

How long is the money withheld?

Usually, money is withheld from a contractor throughout the entire duration of the project, and paid at the end, when the project is "substantially complete.".

There is some nuance to this.

For example, is the project "substantially complete" related to a specific contractor, or relative to the project as a whole?

In other words, if a concrete contractor finishes their work on Day 40 of the job, but the job as a whole doesn't conclude until day 400, does the concrete contractor get their retainage payment on Day 40, or Day 400?

Too often, the answer is _Day 400!_, at the bitter end of the project. And, sometimes, even further after that, since contractors and developers are allowed to withhold this money even beyond completion. This sounds crazy at first, but you have to remember that the general contractor is also frequently waiting for their retention payment, too! Check out this question on our Expert Center, for example, from a general contractor being asked by a sub to provide retention funds early, Subcontractor asking for release of retention before my portion of the work has been completed .

When abused, contractors and developers will sit on this cash as long as possible.

There are some states that limit these practices. Otherwise, the construction contract is a place where the parties can negotiate for more fair treatment of this money. However, too often, this money is subject to nefarious practices.

Lien rights expire before withheld money is I get longer to file a lien for the retainage?

This is probably the most asked question we field at Levelset. And generally speaking, it doesn't have a very good answer.

Here is an example of the question on our Expert Center about a situation in Texas, whereby a GC is asking that a filed mechanics lien be removed before the retainage is paid. What to do? . And here is another one that happened in Florida, where the subcontractor wonders how they can file a lien for retainage not due until 1 year after project completion when the lien deadline is 90 days after the last day of a job!

These are really good questions, and the answer is unsatisfying. While this is a super common situation faced by contractors, the laws very rarely address it. And so the catch-22 remains in tact. You have lien rights and you can file a lien for retained money. But, if you don't file your lien, the lien rights will expire, even if the retained sums are not due!

Here is how one of our experts explained how you might think about this situation: "Ultimately, it comes down to a business decision for the sub/trade. If they intend to utilize a mechanics lien to recover retained money, that lien would need to be filed within [the lien period] - and that deadline is strict. However, if the sub/trade is unwilling to make a lien claim for retention, they'll have to recover it some other way if a payment dispute arises (such as by making payment demands, taking the matter to small claims court, or even pursuing litigation)."

In what circumstances is Retainage normally used?

As mentioned above, withholding money from contractors is standard in the construction industry, and in fact, is occasionally mandated. This is a 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 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 it may be withheld is dependent on the location of the project.

For more detailed information regarding the variances between states with respect to rules and requirements, please see the 50-state breakout section. You can choose your state to examine the rules and culture there by viewing this map.

Does Retainage change according to the project type?

Yes. 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 money may be withheld is generally dependent on the project type.

For more detailed information regarding the variances between states with respect to rules and requirements, please see the 50-state breakout section.You can choose your state to examine the rules and culture there by viewing this map.

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 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 withholdings like this that run afoul of the statutory requirements or regulations, can result in legal liability and penalties.

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Construction attorneys: Courtney Stricklen, Christopher Ng, Andrea Goldman, and Peter Ryan

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Map of Retainage Rules Across United States

Does the state regulate how much money can be withheld from a subcontractor? How quickly must the contractor's retention be paid back? What is the process to demand payment of retention money? This map gives you a quick glance to better understand it all.

  • Unregulated
  • No More Than 10%
  • No More Than 5%
  • Reasonable Amount
  • Prohibited

Free Retainage Demand Letters & Forms

It’s common for retainage to get withheld from contractors on construction jobs all across the world. But, did you realize that it’s sometimes required to send specific notices and legal documents to maintain your rights to claim retainage? Otherwise, the general contractors, owners, developers, or lenders may just sit on the retainage and wait for subcontractors to take action.

Here are some forms and legal notices you may need to stay ahead on retainage.

Notice of Intent to Make Retainage Claim Form

Notice of Intent to Make Retainage Claim Form

This is not a required document in any state, however, it can still be effective to speed up payments. By sending this notice, a claimant...

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