Retainage, also known as retention, is a common practice in the construction industry. It refers to withholding a percentage of the contract price until a later date. It’s done to offer the owner some protection, and to give contractors extra motivation to finish the job to spec. But it can be an added burden on contractors—and especially subcontractors at the end of the pay chain—who already often have great difficulty managing cash flow. Also, some unscrupulous owners do try to take advantage of retention. So, here’s some information about retainage for all contractors to be aware of.
Basic Information About Retainage (Retention)
- The typical retainage rate is 5 to 10% of the contract price.
- Retainage isn’t taken up front; it’s generally divided up and withheld from each progress payment. So, for example, if there’s a $500,000 contract with a 10% retainage ($50,000), and there are 10 progress payments scheduled, $5,000 will be withheld from each installment.
- Retainage is negotiable. It’s part of the contract, which means the two parties must agree on the percentage. While you probably wouldn’t turn down a project over the retention (although it’s possible that you’d have to), you can always try negotiating a lower rate by making other, more reasonable concessions in the contract.
- There are federal laws regulating retainage, and many states have additional regulations capping the percentage and mandating prompt release of funds. Florida, however, only regulates public works projects completed for state, county, or local governments and that have a contract price of at least $200,000; retainage for private projects is unregulated by the state. For qualifying public works projects, retention cannot exceed 5% of each progress payment, and retainage must be paid out in full within 30 days of substantial completion (this can be contractually extended to up to 60 days after substantial completion for projects with a contract price over $10 million).
- Release of retained funds is typically based on “substantial completion” of the project. This is a standard industry term, but it doesn’t have a standard definition. It can be quite vague in some contracts. So, insist that it be well defined with tangible markers in your contracts.
- Unfortunately, the deadline for filing a mechanics lien claim is generally not extended to accommodate retainage. Because retention lasts beyond the end of the project, contractors—and again, especially subcontractors who finished their work long before project completion—are often faced with a deadline for filing a claim that arrives before retainage payment is due.
- Here’s some less-known information about retainage: You may be able to negotiate the purchase of a retention bond from a surety company that offers them instead of retainage. The surety company would cover a cost the hiring party normally would have used retained payments to cover. Depending on the contract price, this may be an affordable way to improve your cash flow while providing the owner with additional reassurances.
