For example, an owner and contractor might decide to keep 10% of the payments until the job reaches 50% completion, after which they will reduce the retainage on progress payments to 5%. Retainage, or retention or holdback, is a common practice in the construction industry where a portion of payment, typically 5-10%, is withheld until a predefined milestone is achieved on a building project. Retainage has a long history in the industry and can apply to both general and subcontractors. Through retainage is significantly dependent on the contract; there are federal and state laws that govern retainage. Almost all states have prompt payment laws and several statutes that set payment deadlines and retention limits. Apparently, contractors and owners aren’t allowed to withhold a greater Certified Public Accountant percentage than the rate being set out by these laws.

Standardized Job Descriptions

So much so, that most owners don’t pay contractors in full until a construction project is “substantially complete” according to its design intent. This concept of holding back a portion of money until a job is signed off on is called retainage. It’s just another one of the many ways construction accounting is unique. 894 (1953), the taxpayer manufactured housing units as part of a contract with the U.S. government. Payments were to be made based on an estimated percentage of project completion, with 10% of these payments to be retained until final acceptance by the government contracting office. The Tax Court held the taxpayer should include in income the payments based on the estimated percentage of project completion, less the 10% retainage.

• Check the laws in your state to know the limits to retainage that apply to your project.
• Don’t get put into a bind by running out of cash before the project is finished.
• In a perfect world, companies would receive payment immediately after project completion.
• Once the amount has been established by the contracting parties, the project retainage percentage will be applied.
• Retainage rates can easily equal (or surpass) the entire project’s profit margin.
• Two out of every three subcontractors have 10% withheld from them, but only one out of three general contractors, architects, and construction managers have the same burden.

What You Need to Know as a Contractor

Overall, the practice and purpose of withholding retainage are frequently misunderstood by many. Below are the seven important things that contractors should know and understand about retainage and how to ensure they accumulate it all at the end of every project. On the other hand, retainage is another different feature of construction.

How to Account for Retainage Payables

Another problem arises when the contractor withholds from its subcontractors at a greater percentage than the owner has withheld from them. Another important term in the construction business is “retainage.” Retainage is the portion (usually 5-10%) of a contract’s price that’s withheld until a project is complete. This portion is held as security for Record Keeping for Small Business either the project owner or contractor – ensuring that contractors or subcontractors complete projects according to contracts.

• In other states, the normal practice is that no more can be withheld after 50% of the project has been completed.
• Retainers protect clients and their money by guarding against substandard and incomplete work.
• With access to private, hard-to-find projects, you can connect with architects and owners on projects still in the pre-design and design stages.
• So whether you’re a GC or a sub, this guide on construction retainage is important since, on most/all projects, you’re affected.
• A contractor may request that the retainage be reduced to 100% of the value of the remaining contract, realistically when at least 95% of the contract has been paid.

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Contractors retention vs retainage working in both states will have similar options to avoid cash retainage. But because retainage is often held until the very end of the project — well after the subcontractor has left the job — it can cause a dilemma. Mechanics lien laws have specific deadlines that contractors must follow. If they let the filing deadline lapse without filing a lien claim, lien rights may be lost forever.

Legal Limits

Contract terms set an amount that is withheld from each payment to protect owners. Retainage is also written into the agreement between a contractor and a subcontractor. Suppliers and subcontractors must wait to receive retainage until the primary contractor receives their retention payment from the owner. For public construction projects, the amount of retainage is determined by state laws and varies from state to state. This means that subs have to wait until a project is finished before making a dime of profit.

Retainage — or retention or holdback — is a common practice in the construction industry where a portion of payment, typically 5-10%, is withheld until a predefined milestone is achieved on a building project. Retainage protects clients by ensuring that contractors adhere to agreed-upon agreements and complete the project to their satisfaction. While this is typically regarded as favoring customers, it also means that contractors do not have to wait until the completion of a project to receive payment. A performance bond ensures contractors complete projects according to contracts – on time and within budget. A retention bond allows contractors to take hold of the full value of their cash rather than it being withheld throughout a project’s duration.

How Retainage Affects Subcontractors

• Other parties are impacted, for better or worse, by the retention.
• Retainage gives you financial security against subcontractors and suppliers leaving you with an unfinished or substandard project.
• Variable retainage can be used in many different ways and can mean that withheld amounts are being lessened over the contract’s length.
• Nevertheless, the bottom line here is that Retainage can almost always be included in a lien claim…long before the withheld funds are ever actually due.
• If the contractor or subcontractor fails to perform the work as specified, the owner or general contractor will make this request, making the contractor or subcontractor liable for the amount.
• Simply put, these 2 sets of laws could not be any more contradictory.
• The contractor may withhold the subcontractor’s portion of the bond premium.

For suppliers and subcontractors who work at the beginning of a project, this can mean waiting months or even years for payment. Some subs submit the final pay app and just wait to get their retainage. Treat retention payments like any other payment you’re trying to collect. Your final pay app should include conditional final lien waivers from your company and any lower-tier subs and vendors.