Typically, contact retention is released, and the general contractor receives their complete payment at the end of the project. This is a subject of negotiation between the owner and contractor and can be determined by the contract itself. Moreover, if profit margins are tight, which they often are, then retainage amounts can be greater than the negotiated bid percentage of profit. How you reconcile payment and revenue will depend on the terms of your contract. To ensure fairness, retainage terms must be clearly defined in every contract and subcontract.

Contractual basis

If, after the inspection, no defects are found or if the defects have been corrected within the allowed time frame, then the owner must release withheld retainage fees. However, to effectively utilize mechanics lien, contractors need to follow strict regulations and deadlines established by each state. In case contractors discover the retainage withheld from them is not paid to them after all contract terms are fulfilled from their side, they should act promptly to file a claim for retainage due. Though a typical retainage percentage is 5-10%, this can vary depending on the project and jurisdiction. Certain states set upper limits on retainage, such as “no more than 5%” or “no more than 10%”, while others leave it up to the parties involved to negotiate the percentage.

Contractors have a right to get paid — retainage included

The best part is that Knowify supports retainage specifically, particularly with its AIA-style invoicing (payment application) feature set. If you’re relying on retainage funds to hit your account in order to procure materials or hit payroll, you need to take a step back and rethink how you are budgeting for retainage contracts. Consider withheld funds as sunk costs as you’re budgeting and bidding.

Pros and Cons: Is Construction Retainage Beneficial or Problematic?

Still, there are ways to potentially eliminate it or at least mitigate its negative effects. Make sure you know the guidelines in your state that govern retainage in relation to liens, and don’t forget to take the necessary step of filing a preliminary notice to secure your lien rights. This is not a required document in any state, however, it can still be effective to speed up payments. Use our color coded map to learn about the retainage requirements that may affect your next job.

What is retainage in construction?

Likewise, retainage receivables move to accounts receivable when billed. Under GAAP, your accounts receivable are debited for retainage, while accounts payable are credited an identical figure. This is an important distinction to remember, because retainage balances don’t have due and payable dates. Only when retainage has been moved to AR or AP can due dates be applied. The use of retainage also depends on the type of project and its complexity.

It generally refers to a portion of consideration held back by the customer until project completion. For example, a company may invoice a customer 100% of the fee, but the retainage in construction customer holds back, say, 5% until a later date. To ensure nothing is overlooked, consider scheduling dedicated closeout meetings with your lower-tier subcontractors.

Retention bonds can help you get paid faster

To protect your firm, you should insist on payments being released as soon as the project is completed, if not sooner. Verifying that every component of the project is completed to the highest standards is another technique to assure fast payment. When retainage is used on most of their contracts, construction companies are especially exposed to cash flow problems.

As a result, it’s in your best interest to set procedures for tracking and managing cash flow. Retainer protects clients and provides a financial incentive for contractors when used effectively. Sound contracts and well-stated milestone requirements help retainage. Contractors are protected by the mandatory release of retainage, which encourages them to complete projects according to established timelines.

• This article discusses construction retainage, where it comes from, whether it is still relevant in today’s construction industry or maybe there are better ways to secure both owner’s & contractors’ interests.
• Retention will be paid after each stage is completed and signed off by the owner.
• In the volatile labor market of the 1800’s, retainage was a logical protection plan.
• Because stock compensation disclosure issues aren’t broadly pervasive for private companies, PCC members agreed to focus on the most pressing topics that private companies want the council to address.
• During this time, a building expert inspects the property and assesses the quality of the contractor’s work.
• However, while retainage offers financial security and project quality benefits, it also presents challenges, including cash flow strain for contractors and the potential for disputes.

This largely depends on how the contract for the specific project defines substantial completion. Knowify will let you change your retainage amount part-way through a job and will correctly adjust your next pay app for you. This feature is particularly handy if you negotiate a reduction in retained funds toward the end of the project. If you have an in-house accountant, consider creating a contingency or emergency fund.