What Is Retainage? Everything a Contractor Needs to Know

Retainage is an amount of money withheld from payment to a contractor or subcontractor until the end of the construction project, or a time specified in the contract. Also known as “retention,” the practice of withholding retainage is commonly used to ensure that the contractor or subcontractor finishes work completely and correctly. Most construction contracts require the contractor to hold back a particular proportion of the contract amount (usually 5% or 10%) until the project is substantially completed. This causes cash flow issues in an already cash-strapped industry, the technique is far too frequently abused, and it is, of course, governed by complex regulations that make it challenging to implement. Another problem arises when the contractor withholds from its subcontractors at a greater percentage than the owner has withheld from them.

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In this case, a $30,000 payment x 10% retainage would equal $3,000 in holdback for each payment. Fixed retainage uses a consistent fixed rate – generally between five and ten percent – that is held back from each payment. Retainage terms typically allow payers to hold retainage until the end of the project or until a certain percentage of work is finished.

• Use our color coded map to learn about the retainage requirements that may affect your next job.
• With PandaDoc contract management software, adding a retention clause to your contract is easy.
• The word “substantially” is the key word here since it indicates that retainage is not released upon completion of the project but only when it reaches a certain level of completion defined in the contract.
• Sometimes, contractors must have to make formal demands for retainage.
• The retainage is usually paid to the contractor, who subsequently distributes it to subcontractors after the project is fully completed.
• You should check out the payment reputation and practices of your contractor to see whether anyone reports them engaging in this abusive practice.
• Do not leave the task of getting paid to the project manager or debt collector.

Residential Construction in Texas: Do Retainage Rules Apply?

And with the uniqueness of the construction industry, contractors need management software that best optimizes their administrative and accounting work. From digital invoicing to invoice approvals, and lien management to paying retainage, cloud-based financial management software can help construction businesses of all sizes. It can automate invoicing, retainage in construction with specific line items for retainage in both directions (accounts receivable retainage and accounts payable retainage). Retainage from individual installments may not necessarily represent much hardship during the construction process. But over the course of the project, that money adds up to a strong incentive for a contractor to finish the job.

How Long Should Retainage Be Withheld?

If they leave without warning, having to unexpectedly replace contractors and other workers was time-consuming and expensive. Retainage sought to hold back the profit portion of the money for the contractor, rather than put the investor’s money at risk, thereby incentivizing proper execution of the project. Some jurisdictions set limits on the amount of money that may be retained on payments, how that money must be held, and which types of projects are allowed to use retention in the first place. One common question that many folks in the construction industry have is whether the Texas retainage rules apply to residential projects….

Deskera People helps digitize and automate HR processes like hiring, payroll,leave, attendance, expenses, and more. Simplify payroll management and generate payslips in minutes for your employees. 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. Classes include professionally produced videos taught by practicing craftspeople, and supplementary downloads like quizzes, blueprints, and other materials to help you master the skills. Retainage is a common practice in many states across the United States.

• After two years of study, the Private Company Council (PCC) decided to remove the issue of stock compensation disclosures from its agenda.
• Accounting for retainage payables generally means tracking holdback from contractors, subcontractors, and vendors throughout the entire project.
• The retainage fees are not taxable until the project is complete and you have received the payment.
• This type of flow does not work well for many contractors because you are waiting for substantial completion on a job and different trades finish at different times on the same project.

Subcontractors also have to deal with retainage, and funds are often released much more slowly from contractor to subcontractor than from the client. Suppliers and subcontractors must wait to receive retainage until the primary contractor receives their retention payment from the owner. Retention payments reduce risk for owners by ensuring contractors meet their contractual obligations. They also reduce risk for primary contractors who rely on subcontractors and suppliers. The line items for retainage on an invoice show the amounts the project owner is supposed to withhold when paying the invoice. Different invoice line items may indicate how much money has been withheld for various categories (labor, materials) and how much was paid out in a particular progress payment.

You should check out the payment reputation and practices of your contractor to see whether anyone reports them engaging in this abusive practice. Retainage is commonly withheld until the end of a construction project overall, rather than the completion of a particular contractor’s work. This means that contractors or subcontractors whose work comes near the beginning of a project may have to wait months or years to collect all of the money owed to them. Retainage protects clients by ensuring that contractors adhere to agreed-upon agreements and complete the project to their satisfaction.

• Many business payments are done within 30 days after the request is made.
• Rates tend to be higher on private construction projects and lower on federal, state, and municipal projects.
• As such, the process can easily get derailed if you don’t focus on it.
• Considering the sensitive nature of construction projects, where each party has its own vested interests, each of them also tries to add more layers of security for their benefit.

Why Would You Use It as a Contractor?