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What Is Retention in Construction?

And so, beginning with the Office of Federal Procurement Policy’s urging in 1983, federal and state governments started passing laws governing and limiting retainage. The federal government was one of the firsts to address this, and has a number of limitations on how much money can be withheld from contractors on federal jobs. Though indirectly, construction project management software can help secure your retainage fee.

The Ultimate Guide to Retainage in the Construction Industry

This largely depends on how the contract for the specific project defines substantial completion. Before you sign a construction contract, ensure you understand the retainage amount and when you will receive it. Imagine a client hires a contractor to build a 2,500-square-foot home for $150 per square foot. For example, say a contractor agrees to complete a $50,000 project with a $5,000 (10%) retainage fee.

It’s withheld from each payment

• Next, make sure that retainage is correctly recorded on your company’s balance sheet.
• Usually, the 5% in retainage will be withheld from each progress payment.
• From large upfront job costs to unexpected change orders, it’s not uncommon for contractors to experience pretty significant delays in payment.
• This typically occurs after the project owner has confirmed that all work has been completed satisfactorily and any defects or punch list items have been resolved.
• In other words, if you send the required preliminary notices within the time they need to be sent, then you are protected — and that includes any withheld funds.
• This two-stage process ensures that financial incentives align with project milestones and completion, offering security to project owners while motivating contractors to maintain quality and efficiency.

You can also look into subcontractor performance bonds or retainage bonds as a unique alternative to traditional retainage. Subcontractor performance bonds are a special agreement between a subcontractor and a surety. retainage in construction In this agreement, the surety guarantees to complete the project in place of a subcontractor should the subcontractor fail to meet contractual obligations.

Helping Thousands of Contractors Like You With Retainage

• To limit these difficulties, here are four steps to efficiently manage retainage in your construction projects.
• This is especially true because the rules are very specific and vary from state-to-state and job-to-job.
• Retention in construction is when a property owner or employer retains a percentage of a contractor’s fee (usually 5-10%) as security.
• Since all payment processes, including contracts, invoices, and purchase orders, are managed within the platform, tracking retention becomes effortless.
• At the end of the day, there’s really just one reason why a business — any business — fails.

Ensuring that all financial processes align with project goals and timelines. If you have any questions or concerns, it’s critical to income summary address them before signing a new contract. Don’t hesitate to clarify things with your legal department or a qualified construction law attorney – you’ll thank yourself later. Either way, we recommend looking into your state’s specific rules and requirements – including how your state defines completion of a project versus final approval of the job – to avoid any confusion.

• Under New Mexico’s rules, by contrast, withholding retainage is prohibited.
• So on a $100,000 contract with 10% retainage, the contractor doesn’t have to fork over ten grand at the beginning.
• On the other side of the coin, those having retainage withheld from them may find their cash flow suffers as a result.
• In the private sector, for any work that’s eligible for a mechanic’s lien, the project owner is required by law to retain 10% of either the contract price or the value of the work completed.
• For suppliers and subcontractors who work at the beginning of a project, this can mean waiting months or even years for payment.
• In some instances, property owners and contractors must reduce retainage rates or eliminate retainage after a certain amount of a project has been completed.

Some surety companies offer retention bonds, which is essentially an insurance policy that takes the place of retainage as a guarantee of workmanship. A subcontractor may be able to negotiate an agreement in which they purchase a retention bond instead of having funds withheld from their payments. If an issue later arises for which the hiring party would have used retainage to cover the cost, the surety company steps in to pay. Owners and contractors are not allowed to withhold a percentage greater than the rate set out by these laws.

Managing disputes and litigation

ENR.com and the Construction Financial Management Association (CFMA) recently published some articles suggesting that “cash-strapped public and private owners are… This is not a required document in any state, however, it can still be effective to speed up payments. MT Copeland offers video-based online classes that give you a foundation in construction fundamentals with real-world applications, like an introduction to construction law.

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 Food Truck Accounting owner and contractor and can be determined by the contract itself. Quite often, you will see the terms of construction retainage and construction retention used interchangeably. While retainage refers directly to the sum of money withheld, retention is more about the process of withholding that money. In this article, we use both terms to refer to the same thing – withheld money.