Retainage
A slice of every progress payment held back until the job is finished.
Quick Answer
Retainage is a percentage of each progress payment that the owner withholds from the contractor, and the contractor from its subcontractors, until the work is substantially or fully complete. It gives the payer leverage to get punch list items, closeout documents, and defects addressed. Rates are commonly 5 to 10 percent, and many states limit them.
The Full Picture
Retainage exists as security. Once a contractor has been paid nearly everything, the owner has little leverage to get the last details finished. Holding back part of every payment keeps a fund in reserve for incomplete or defective work and motivates completion of closeout.
Mechanically, the pay application shows the value of work completed, then deducts the retainage percentage before payment. The GC typically withholds the same percentage from its subcontractors. Retainage is released at a defined milestone, often substantial completion or final completion, sometimes reduced partway through the job once work is progressing well. On federal fixed-price construction, FAR 52.232-5 allows the contracting officer to retain up to 10 percent when progress is unsatisfactory, and FAR 32.103 cautions against using retainage as a substitute for good contract management.
Rates and rules vary widely. Private contracts commonly specify 5 to 10 percent, and many states cap retainage on public projects, require it to be held in escrow or interest-bearing accounts, or set deadlines for releasing it. The federal Prompt Payment Act addresses how prime contractors may retain from subcontractors on federal work.
In preconstruction, retainage is a cash-flow cost. A contractor carrying 10 percent retainage on a large job is effectively financing part of the project, and subcontractors often price that carrying cost into their bids. Early trades such as sitework and concrete feel it most when retainage is not released until the whole building is complete.
Real Examples
Common Misconceptions
People assume: Retainage is a penalty for poor performance.
Actually: It is standard security withheld on nearly every payment regardless of performance. It is earned money whose payment is deferred, not money forfeited.
People assume: Retainage is always 10 percent.
Actually: Rates vary by contract and jurisdiction, commonly 5 to 10 percent, and many states cap or regulate retainage on public work. Some contracts reduce or eliminate it partway through the job.
Frequently Asked Questions
What is a typical retainage percentage?
Commonly 5 to 10 percent of each progress payment. Public projects are often capped by state law, and many contracts reduce the rate once the project passes a milestone such as 50 percent complete.
When is retainage released?
Usually at substantial completion or final completion, after punch list work and closeout documents such as warranties, as-builts, and lien waivers are delivered. Some contracts release a sub's retainage when its scope is accepted.
Do general contractors withhold retainage from subcontractors?
Yes. GCs typically withhold at least the same percentage the owner withholds from them, and subcontract terms define when that retainage is released.
What is the difference between retainage and a pay-if-paid clause?
Retainage is a fixed percentage withheld from each payment as security. A pay-if-paid clause makes the GC's payment to a sub conditional on the owner paying the GC. Both affect sub cash flow in different ways.
How does retainage affect bid pricing?
Carrying retainage ties up cash, so contractors and subcontractors may price that financing cost into their bids, particularly early trades whose retainage is held until the end of the project.