The Ultimate Guide to Retainage in the Construction Industry

Besides, there are projects like public construction where retainage is not permitted in some countries. If your retention of payment is 10% ($10,000 from a $100,000 total contract), then 10% will be withheld from each progressive payment. Retainage fee (I can also call it contract retention or holdback) is usually 5-10% of the contract value that an owner holds or retains from the general contractor’s payment until the project is substantially complete. In my article, I will discuss construction retainage, where it comes from, whether it is still relevant in today’s construction industry, and how construction management software can help in calculating it. Considering the sensitive nature of construction projects, where each party has its own vested interests, each party tries to add security for its benefit.

What are the Retainage Rules For Your Job?

Financial management software also allows contractors to standardize their forms across allprojects, increasing efficiency. It helps pay subcontractors quicker as well, thus reducingerrors and risk. The more efficient bookkeeping you are with your accounting and paperwork, the more youcan dedicate company resources to the value-added and client-focused parts of the business. Some surety companies offer retention bonds, which is essentially an insurance policy that takes the place of retainage as a guarantee of workmanship. A subcontractor may be able to negotiate an agreement in which they purchase a retention bond instead of having funds withheld from their payments.

• Easy document sharing, collaboration tools, and real-time reporting let you share job progress without adding to your administrative burden.
• This means that contractors and subcontractors must fully understand how it works for every project and create a financial plan that accommodates such conditions.
• Empower your PMs to improve billing efficiency and increase project profitability.
• This money acts as a security against poor or incomplete work and is released once the work has been finished according to the terms and conditions laid out in the contract.
• Retainage refers to the practice of withholding a percentage of a construction contract’s total amount from a contractor or subcontractor.
• My GC and I had a personal dispute, (the GC failed to pay me for 5 months on an unrelated job for the State of Arizona, and my “letter of intent to lien” gave notice to all interested parties…

Retainage in Accounting FAQs

For retainage vs retention public construction projects, the amount of retainage is determined by state laws and varies from state to state. The practice originated in the 1840s as a way to minimize the owner’s risk and ensure the project is completed fully in line with the job specifications. Retainage is common in public and private projects, with the retained amount usually ranging from 5% to 10% of the total payment. To protect your firm, you should insist on payments being released as soon as the project is completed, if not sooner. Verifying that every component of the project is completed to the highest standards is another technique to assure fast payment. They may float all of their costs at the start and often have to wait for the longest for complete payment.

How retainage is structured in a construction contract

Because money stuck in retainage is money you can’t use to grow your business. In Iowa, a contractor may request the early release of retainage on a public project. It’s a period of 3-12 months after the reference date of the final payment or the date specified in the construction contract. During this time, a building expert inspects the property and assesses the quality of the contractor’s work. They determine if any defects need to be improved before final payment is made.

When ABC completes the project, they will invoice the customer for $10,000 in retention. This invoice is recorded in the chart of accounts as a credit of $10,000 to retention receivable and a debit of $10,000 to accounts Liability Accounts receivable. Governor Kathy Hochul signed Senate Bill S.3539/A.4167, popularly referred to as the 5% Retainage Bill, into law on November 17, 2023. This bill modifies Sections 756-a and 756-c of the New York General Business Law, which deal with retainage and payment in construction contracts. In this example, for a $30,000 payment, $3,000 would be withheld as retainage, leaving the contractor with a net payment of $27,000.

• If the retainage is a fixed rate on the entire contract, then this section is unnecessary on the continuation sheet.
• Other best practices for construction accounting can help contractorsand subcontractors reduce the burden of held back funds.
• The project phases or stages and the construction benchmarks may also determine retainage conditions, such as assigning milestones to release withheld funds upon project delivery.
• To counter these unfavorable characteristics, retainage-oriented state legislation is being introduced around the country.
• In most cases, the terms “retention” and “retainage” are used interchangeably.

What Are “Back Charges” in Construction?

• While this does not address the retainage problem head-on, it does minimize the problem significantly since the completion of the project will also trigger the retainage payment.
• This article is provided for informational purposes only—it does not constitute legal advice and does not create an attorney-client relationship between the firm and the reader.
• When the project is complete, Paul’s invoices ABC for $5,000 in retention.
• Depending on the size of the contract, a retention bond may be a low-cost way to find an agreement that improves the contractor’s cash flow and satisfies their hiring party.
• But over the course of the project, that money adds up to a strongincentive for a contractor to finish the job.
• There is no need to calculate everything manually or enter data each time you write an invoice.

As with a lot of things in construction, where you work will influence the rules and standards around retainage. To make matters more complicated, every state has a different definition of what constitutes the satisfactory completion of a job. As with all good accounting processes, all parties on a project need to maintain up-to-date balances as it relates to retainage receivables. 👉 Retainage receivable – The amount of retainage owed to a contractor, sub, or supplier from the project owner or GC. However, the court determined that the right to receive certain amounts of the retained fee had not yet become fixed and final until a final audit was complete. In fact, the taxpayer was not ultimately entitled to the full amount of the retainage, due to adjustments made during the audit.