Managing Retainage In Construction (2023 Update)

Construction retainage is a practice where a portion of a construction payment is held back until the project is completed. This practice is commonly used in the construction industry as a way to protect the owner or client of a construction project. 

By withholding a portion of the payment until the project is finished, the owner or client can ensure that the contractor has a financial incentive to complete the work on time and to the agreed-upon standards. Additionally, retainage can help protect the owner or client from potential issues such as cost overruns or poor-quality work.

How retainage is calculated with examples

Retainage is typically calculated as a percentage of the total contract price for a construction project. The exact amount of retainage that is withheld can vary depending on a number of factors, such as the size and complexity of the project, the reputation and financial stability of the contractor, and the terms of the contract. In general, however, retainage is typically withheld in an amount of 5-10% of the total contract price.

To calculate the retainage amount, you would first need to determine the total contract price for the project. For example, if the total contract price is $100,000, the retainage amount would be 5-10% of that amount, or $5,000-$10,000.

To illustrate this further, let’s look at two examples.

Example 1:

• Total contract price: $100,000
• Retainage percentage: 7%
• Retainage amount: $7,000

In this example, the total contract price is $100,000 and the retainage percentage is 7%. This means that the retainage amount would be $7,000, which would be withheld from the total contract price until the project is completed.

Example 2:

• Total contract price: $500,000
• Retainage percentage: 8%
• Retainage amount: $40,000

In this example, the total contract price is $500,000 and the retainage percentage is 8%. This means that the retainage amount would be $40,000, which would be withheld from the total contract price until the project is completed.

In both examples, the retainage amount would be withheld until the project is completed and the owner or client is satisfied with the work. Once that happens, the retainage funds would be released to the contractor.

The typical retainage percentage that is withheld

The typical amount of retainage that is withheld in a construction project can vary depending on a number of factors, such as the size and complexity of the project, the reputation and financial stability of the contractor, and the terms of the contract. In general, however, retainage is typically withheld in an amount of 5-10% of the total contract price. This amount can differ between the residential and commercial construction industries.

In the residential construction industry, the amount of retainage that is withheld is often on the lower end of the 5-10% range. This is because the risks associated with residential construction projects are typically lower than those associated with commercial projects. Additionally, residential construction contracts are often smaller in scope and value compared to commercial contracts, which can also affect the amount of retainage that is withheld.

In the commercial construction industry, the amount of retainage that is withheld is often on the higher end of the 5-10% range. This is because commercial construction projects are often larger and more complex than residential projects, and the risks associated with these projects are generally higher. Additionally, commercial construction contracts are often more valuable than residential contracts, which can also affect the amount of retainage that is withheld.

As an example, let’s say that a residential construction project has a total contract price of $100,000. In this case, the owner or client might withhold 5-6% of the contract price as retainage, or $5,000-$6,000. Once the project is completed and the owner or client is satisfied with the work, the retainage funds would be released to the contractor.

On the other hand, let’s say that a commercial construction project has a total contract price of $1,000,000. In this case, the owner or client might withhold 9-10% of the contract price as retainage, or $90,000-$100,000. Once the project is completed and the owner or client is satisfied with the work, the retainage funds would be released to the contractor.

The pros and cons of using retainage

There are both pros and cons to using retainage in construction projects. Some of the potential advantages of using retainage include:

• Protecting the owner or client from cost overruns or poor-quality work
• Providing a financial incentive for the contractor to complete the work on time and to the agreed-upon standards
• Ensuring that the contractor has enough funds to cover the cost of materials and labor
• Allowing the owner or client to withhold payment for work that is not completed or does not meet the required standards

Some of the potential disadvantages of using retainage include:

• Impacting the cash flow of contractors and subcontractors, who may have to wait to receive the full payment for their work
• Potentially leading to disputes and misunderstandings between the owner or client and the contractor
• Creating administrative burdens, as the retainage amount must be tracked and released at the appropriate time
• Increasing the overall cost of the project, as the contractor may need to pay interest on funds that are withheld as retainage

Overall, the use of retainage can be a useful tool for protecting the interests of the owner or client in a construction project. However, it is important for all parties to carefully consider the potential pros and cons before deciding to use retainage in a particular project.

Legal considerations regarding retainage

The legal requirements and regulations surrounding retainage can vary depending on the state in which the construction project is taking place. In general, however, retainage is subject to the same laws and regulations that apply to other aspects of construction contracts, such as payment terms, liens, and bonding.

Some states have specific laws and regulations that apply to retainage. For example, some states have laws that limit the amount of retainage that can be withheld, or that require the retainage funds to be held in a separate account. Other states may have laws that require the owner or client to release the retainage funds within a certain time frame after the project is completed.

It is important to carefully review the laws and regulations that apply to retainage in your state to ensure that you are in compliance with these requirements. If you are unsure about the legal requirements and regulations surrounding retainage in your state, you may want to consult with a lawyer who specializes in construction law. They can provide guidance on the specific requirements that apply to your project and can help you avoid any potential legal issues.

When is retainage paid and who holds retainage

Retainage is typically paid when a construction project is completed and the owner or client is satisfied with the work. At this point, the owner or client will release the retainage funds to the contractor. In some cases, the retainage funds may be paid in installments as the project progresses, with the final installment being released upon completion.

In most cases, the owner or client will hold the retainage funds until they are released to the contractor. This means that the owner or client is responsible for tracking the retainage amount and ensuring that it is released at the appropriate time. Some contracts may specify that the retainage funds be held in a separate account, such as an escrow account, to ensure that they are available to pay the contractor when the project is completed.

In some cases, the owner or client may require the contractor to provide a performance bond or letter of credit as a guarantee that the project will be completed. In these cases, the performance bond or letter of credit may be used to cover the retainage amount, and the funds may be held by a third party, such as a bank or surety company. This can provide additional security for the owner or client, but it can also add complexity and cost to the project.

Best practices for managing retainage, including tracking and releasing payments

There are several best practices that can help ensure that retainage is managed effectively in a construction project, including:

• Clearly defining the retainage amount and terms in the contract: The contract should specify the exact amount of retainage that will be withheld, as well as the conditions under which it will be released. This can help avoid misunderstandings and disputes later on.
• Tracking the retainage amount: The owner or client should keep track of the retainage amount throughout the project to ensure that it is released at the appropriate time. This can be done using software or other tools to manage and track the retainage funds.
• Communicating with the contractor: The owner or client should maintain clear communication with the contractor throughout the project to ensure that any issues or concerns are addressed promptly. This can help avoid misunderstandings and disputes regarding retainage.
• Ensuring that the retainage funds are held in a secure and accessible account: If the retainage funds are held in a separate account, such as an escrow account, the owner or client should ensure that the account is secure and that the funds are readily available when they are needed.
• Reviewing the work and issuing any necessary retainage release requests: Before releasing the retainage funds, the owner or client should carefully review the work to ensure that it meets the required standards. If the work is not satisfactory, the owner or client may need to issue a retainage release request to the contractor to address any deficiencies.
• Seeking legal advice: If there are any disputes or misunderstandings regarding retainage, the owner or client may need to seek legal advice to resolve the issue. This can help ensure that the interests of all parties are protected.

Here’s a great video by the American subcontractors outlining best practices to follow:

How clear communication and documentation helps you better manage retainage

Clear communication and documentation are crucial when dealing with retainage in a construction project. This is because retainage can be a complex and sensitive issue, and misunderstandings or disputes can arise if the terms and conditions are not clearly communicated and documented.

Having clear and concise communication between the owner or client, the contractor, and any other relevant parties can help ensure that everyone understands the terms and conditions of the retainage agreement. This can help avoid misunderstandings and ensure that the retainage funds are released at the appropriate time.

Documentation is also important when dealing with retainage. This includes keeping detailed records of the retainage amount, the conditions under which it will be released, and any communications or other relevant information. This can help provide a clear and accurate record of the retainage agreement, which can be useful if any disputes or misunderstandings arise.

Technology can be used to improve communication and documentation when dealing with retainage. For example, construction project management software can be used to track the retainage amount and release payments at the appropriate time. This can help streamline the retainage process and reduce the risk of errors or misunderstandings. Additionally, using electronic communication and document management tools can help ensure that information is shared and stored securely and efficiently.

The potential for disputes and misunderstandings regarding retainage

There is potential for disputes and misunderstandings to arise regarding retainage in a construction project. This can happen for a variety of reasons, such as misunderstandings about the terms and conditions of the retainage agreement, disagreements about the quality or completion of the work, or issues with the release of the retainage funds.

If a dispute or misunderstanding arises regarding retainage, it can cause delays and additional costs for the project. It can also damage the relationship between the owner or client and the contractor, which can have negative impacts on the project and future business opportunities.

To avoid disputes and misunderstandings regarding retainage, it is important for all parties to carefully review the terms and conditions of the retainage agreement and to clearly communicate any concerns or issues. It is also important to have clear and detailed documentation of the retainage agreement and any related communications. If a dispute or misunderstanding does arise, it is important to seek legal advice and take appropriate action to resolve the issue in a timely and effective manner.

There are several steps that you can take to protect yourself from disputes regarding retainage in a construction project. These include:

1. Carefully review the terms and conditions of the retainage agreement before signing the contract. Make sure that you understand the exact amount of retainage that will be withheld, the conditions under which it will be released, and any other relevant details.

2. Clearly communicate with the owner or client and any other relevant parties throughout the project. Keep detailed records of any discussions or communications, and document any agreements or changes to the retainage agreement.

3. Use technology to track progress, the retainage amount, and manage payments. This can help ensure that the retainage funds are released at the appropriate time and can provide a clear and accurate record of the retainage agreement.

4. Seek legal advice if there are any disputes or misunderstandings regarding retainage. A lawyer can help you understand your rights and options and can provide guidance on how to resolve the issue.

By taking these steps, you can help protect yourself from disputes and misunderstandings regarding retainage in a construction project.