What is Retainage?
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Have questions about retainage on your job, or retainage in general? This is a tricky area of law that can really impact your job, your cash, and/or your job risk. Learn everything you need to come out alive!
Map of Retainage Rules Nationwide
Retainage rules are different all across the country and the world. Use our color coded map to learn about the retainage requirements that may affect your next job.
Demand Your Retainage Payment
Too often, contractors wait a long, long, long time to get paid the retainage withheld on a job. Sometimes, you need to make a specific demand to get retainage. Let's help you with this!
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.