What Is Retainage in Construction?

Owners withhold retainage so a contractor who has been paid for nearly all the work still has a reason to finish the punch list, deliver O&M manuals, and correct defective work. The amount is visible on every pay application: retainage to date, retainage this period. Subcontractors watch it because their retainage is often stuck until the prime’s retainage moves.

The rate is a commercial term. Ten percent on a long job is a large receivable. Five percent is common on public work because statutes say so. Some contracts drop from ten to five after the job is half complete. If you do not read the payment article, you will forecast cash from the wrong percentage.

At substantial completion many contracts release retainage except an amount the architect sets to cover incomplete work, often something above the estimated punch cost. The rest waits for final payment, consent of surety if the contract requires it, and final lien waivers. "Substantially complete" on a certificate does not wire the retainage the same day.

Subcontractor retainage follows the subcontract, which may say the sub is paid retainage when the owner pays the prime, not when the sub’s own work finished. That pay-if-paid or pay-when-paid language is heavily litigated and sometimes limited by statute. The prime’s schedule of values will not explain it. The subcontract will.

Retainage usually applies to work in place and may or may not apply to stored materials, depending on the contract. Change orders are generally subject to the same rate once they are in the contract sum. Calculating retainage on the original contract only, after large change orders, under-withholds. Calculating it on a line the contract exempts, such as insurance or a bond, over-withholds.

A pay application that "rounds" retainage will not match the next one. The continuation sheet should carry the balance forward. Reconstructing retainage from bank deposits at closeout is a sign the sheet was not trusted during the job.

Some contracts allow a retainage bond or a letter of credit in lieu of cash withholding, more often late in the job or on large subcontracts. The owner still has security. The form of security changed. That substitution should be written. A handshake that "we’ll stop holding five percent" is a modification of the payment clause.

Owners who withhold extra money beyond contractual retainage, as unstructured leverage, create a different dispute: wrongful withholding. Retainage is the authorized hold. Backcharges and disputed change orders need their own documentation. Piling them into the retainage line hides all three.