By withholding a portion of payments until project completion, retainage provides project owners with a safeguard against potential issues such as incomplete work, defects, or contractor defaults. Retainage, also called “retention,” is an amount of money “held back” from a contractor or subcontractor during the term of a construction project. This is a very unique practice specific to the construction industry, but within the industry, it’s extremely popular. Most construction contracts mandate that a certain percentage of the contract price (frequently 5% or 10%) is withheld from the contractor until the entire project is substantially completed. This creates cash flow challenges in an already cash-poor industry, the practice is too frequently abused, and of course, it’s subject to complicated regulations that make it tricky to execute.
Strategies for Handling Retainage
If the contract isn’t written according to law, it won’t stand up in court. Retainage laws vary from state to state and can sometimes conflict with federal legislation. It’s not likely that you’ll get a GC to completely remove the retainage clause. But you might get them to approve more favorable terms, especially if you have a previous relationship with them or an exceptional reputation in the industry. Break silos and improve cash flow with tools that keep everyone on the same page.
What are the Retainage Rules For Your Job?
Both general contractors and subcontractors must review their construction contracts carefully. First, it’s abused to “stay ahead.” It’s a common construction practice to underpay a contractor for work done on a job. If, for example, 30% of work is completed, the developer or GC Accounting for Churches will only pay 25% of the price.
- In some cases, this may also sway clients to waive retainage altogether.
- By holding back a percentage of the payments, project owners can reduce their exposure to financial loss and have a fallback to fund necessary corrective actions.
- By holding back a portion of the funds, there is less chance that a contractor might abandon the project should a dispute arise with the owner or they encounter problems with the job.
- You can view the laws and rules for your state by reviewing our 50-State Retainage Law Guide & FAQ Pages.
- Alternatively, the project may be released when it achieves another designated milestone stipulated in the construction contract.
- By withholding a portion of payments until project completion, retainage provides project owners with a safeguard against potential issues such as incomplete work, defects, or contractor defaults.
Laws set a limit and deadline for retainage
However, while retainage offers financial security and project quality benefits, it also presents challenges, including cash flow strain for contractors and the potential for disputes. In this phase, the amount of money held back is decided, usually between 5% and 10% of the total contract value. However, this can change depending on how complicated the project is and what is normal in the industry. This percentage represents the portion of each payment due to contractors and subcontractors that will be withheld until the project reaches its completion. The first and most important thing to make clear is that in a majority of jurisdictions, retainage is negotiable.
Flexbase has options to help make sure retainage doesn’t put your business on hold. The best way to protect yourself is to make sure that an owner isn’t using different terms to withhold money for the same purpose. Flexbase is ONE software program that can meet all of your construction accounting needs. Select from a variety of construction skills to learn year round, watch video lessons and receive certificates of completion. By subscribing you agree to with our Privacy Policy and provide consent retainage in construction to receive updates from our company.
Understand that Mechanics Lien Deadlines Won’t Be Extended Just Because Retainage Is Still Withheld
On top of that, the margins in the construction industry are bookkeeping notoriously slim. Just like with federal projects, retainage can be withheld on state, municipal, and county projects. In fact, there are very few instances when the laws are in agreement in every state, but this is one of those instances.
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