Retainage is a portion of each payment on a construction job that the person paying holds back until the work is finished. It protects the owner or builder, because some money stays in hand if work is left undone or a defect shows up. Rules and amounts vary by state.
What Is Retainage in Construction?
When a builder finishes part of a job, the customer or the lender does not always pay the full amount. A slice is held back. That held-back money is retainage. It stays in the owner's hands until the work is complete and the contract says it can go out.
The idea is simple. If something is left undone, or a problem turns up after the crew leaves, the person paying still has some money to fix it. That is why retainage shows up in so many contracts, from a home build to a subcontractor agreement.
How Does Retainage Work?
The contract sets the rules. It says what percentage is held, which payments it applies to, and when it is released. Then each time you bill, the held part comes off the amount you are paid.
Here is a simple example with round numbers, just to show the math. Say you bill $50,000 for a stage of work, and the contract holds 10 percent. You get $45,000 now. The other $5,000 is retainage, and it sits until the contract says it can be paid. These are example numbers only. Your contract will have its own.
Retainage on a home build
On a home with a construction loan, retainage often shows up in two places. The lender may hold back part of each draw, and you may hold back part of what you pay your subcontractors. Both follow the same idea, but they are separate agreements. Read each one. To see how draws work, read our guide to the bank draw process, and what a draw request is.
When Is Retainage Released?
Most contracts release retainage when the work is finished. Some name a stage, like a passed final inspection. Others release it in parts as each phase closes. What matters is that the release point is written in the contract, in plain words, before work starts.
The trouble usually comes at the end. A small punch list item is still open, the owner says the job is not done, and thousands of dollars stay held back. Finish the punch list fast and ask for the release in writing.
What Builders Should Watch For
I have seen retainage cause more cash flow trouble than bad work ever did. A few things to keep in mind:
- Know the percentage and the release point before you sign anything.
- Keep the same terms with your subs that you accept from your customer, so you are not paying out more than you take in.
- Track what is held on every job in one place, so you know what is owed to you.
- Rules vary by state. Some states cap how much can be held and set deadlines for release, so check yours.
Retainage is not a penalty. It is a normal part of how construction money moves. The builders who do well with it are the ones who plan for it from the first estimate, not the last invoice.
Retainage and Lien Waivers
Retainage often ties in with lien waivers. When you get paid, the payment may come with a waiver that says you have been paid for that stage. Be careful what you sign when part of your money is still being held. Read the waiver and make sure it does not give up your right to the retainage you have not received yet.
Frequently Asked Questions
What is retainage in construction?
Retainage is money held back from each payment until the work is done. The contract says how much is held and when it is paid out. It gives the person paying some protection if the work is not finished or has problems.
Who holds retainage?
It depends on the contract. An owner can hold it from the builder, and a builder can hold it from a subcontractor. On a job with a construction loan, the lender may also hold back part of each draw. Always check who is holding what, and why.
How much is retainage?
The amount is set in the contract, usually as a percentage of each payment. There is no single number that fits every job. Some states limit how much can be held, so check the rules where you build before you write it in.
When is retainage released?
Usually when the work is finished, or at a stage the contract names, such as substantial completion or final inspection. Some contracts release it in parts. If the contract does not say, you have a dispute waiting to happen, so write the release point down.
Is retainage the same as a holdback?
In everyday talk, yes. Builders use retainage and holdback to mean the same thing, money kept back until the work is done. Holdback is also used for money kept back on a loan draw, so read how your lender uses the word.
How does retainage affect a builder's cash flow?
It can hurt. Every payment you receive is smaller than the work you did, and you still pay your crews and suppliers on time. Plan for it in your cash flow, and ask your subs for the same terms you accept, so you are not paying out more than you take in.
Fun Fact
The word comes from the Latin retinere, which means to hold back.
