Also known as “retention” or “holdback,” retainage refers to a practice commonly used in construction contracts to ensure the completion of a project and guarantee the quality of work. It involves withholding a certain percentage of the contract value from the contractor’s payment until specific conditions are met.
The purpose of retainage is to protect project owners by providing them with leverage to ensure that all contractual obligations are fulfilled. It also serves as an incentive for contractors to complete the work to the required standard and within the agreed-upon timeframe.
Typically, the retainage amount is a predetermined percentage of each payment the contractor receives throughout the project’s duration. The standard retainage percentage varies based on project-specific agreements. It can range from 5% to 10% of each payment, although some contracts may set higher or lower percentages.
Retainage is usually released to the contractor after they’ve completed a large portion of the project or once they’ve met specific milestones. It can be thought of as an added layer of protection for the project owner against unforeseen issues that may arise during construction.
The downside of retainage is that it can have a significant impact on cash flow for contractors and subcontractors so careful financial planning is necessary. Understanding the retainage terms and conditions outlined in a contract can help workers comply with the necessary requirements to receive their full payment in a timely manner.
To summarize, retainage is a common practice in construction contracts that’s used to safeguard project owners and ensure a project’s success. While it can impact the cash flow of contractors and subcontractors, understanding the terms and conditions can help manage expectations and contribute to a positive working relationship.