Before you develop and agree to the next construction contract, you should understand the retainage related to the construction industry that will be listed in your contract until the conclusion of the entire project. This applies to both contractors and subcontractors who are working collectively. If you are unsure about what a retainage is and how it applies to you, continue reading for more information.
What is Retainage?
There is a certain amount of project costs that are retained for the project’s duration while the contractor is working. This is used to encourage timely completion of a project and that the correct quality is applied. Once the project is completed successfully, the retainage is paid to the contractor, who then disperses to subcontractors.
Retainage is very common for various construction jobs, large and small, including public projects and private projects. They do hinder the contractor and subcontractors on the job. It can be a misuse of funds by the owners to take advantage of the contractors, not paying out what is owed to them with the final invoice of the projects.
What is Project Retainage Percentage?
When the retainage is calculated on the project, the project retainage percentage is calculated to be a specific amount payment applied until it is time for the final payment. For example, if the project retainage percentage is 10 percent, then each payment made to the contractor will have 10 percent retained until the project’s conclusion.
Why Would You Use It as a Contractor?
As a contractor, you may need the assistance of subcontractors to complete the project at hand. With retainage, you can also withhold funds from the subcontractor to ensure that their work matches your quality before releasing the funds. Another benefit to having a retainage on your project is preparing and balancing a budget for the project with the actual cash flow and suppliers throughout the project’s progression.
What is the Difference Between Retention and Retainage?
While these terms are used interchangeably, there is a difference between retention and retainage. Retention is the actual holding of the funds agrees upon in the contract, while retainage is the amount of those funds that are being held. They refer to the same amount of retained funds.
How is Retainage Determined?
The retainage amount for the current contractor project is determined based upon the overall cost of the project or contract price. Once the amount has been established by the contracting parties, the project retainage percentage will be applied. In most cases, the payment of retainage comes out of each payment based on this percentage at that rate determined in the timeline.
How Long Can You Hold Retainage?
Legally, retainage fees can be held up to 45 days after the work completed by the contractor has been approved in some states where retainage is unregulated. This is true for both public and private projects.
Other states will require immediate release of funds if the retainage is more than 10 percent on a $100,000 project or 5 percent on a project at $500,000 or more.
What You Need to Know as a Contractor
As a contractor, there are several things to keep in mind when reviewing and agreeing to a retaining for your next construction project, whether it be a public or a private job.
- It is withheld from each payment: While you may have payments set at a certain number to equal the project’s overall cost, do not expect those payments in that established amount. Retainage is taken out of each payment made by the percentage in the construction process.
- It is up for negotiation: You do have the option to negotiate your retainage percentage for your project. While it is a common practice, there is no established percentage amount, despite what some owners may try to tell you during negotiation. For larger long-term projects and require a consistent cash flow, you can negotiate a lower one.
- Laws set a limit and deadline: Depending on what state you are in for the project, there may be a limit placed on how much retainage can be taken by the owner and a deadline on paying it out after the project is completed. All public and federal projects are capped at a 10 percent for projects at the federal level. Private jobs have more flexibility and can retain a higher percentage. Each state may have different retainage laws. Some states require it to end at 50 percent completion, where the first half of the project is completed, and then more substantial payments are paid out until the end of the project. At the longest, owners and contractors paying subcontractors to have 45 days to pay the retainage once the project is complete.
- It usually depends on substantial completion: The term substantial completion means that the job has been completed in its entirety, and it meets the quality standards by the owner and general contractor. Inspections are done to ensure that the job was done correctly and any errors found in the first inspections are completed to match quality expectations.
- It does not extend the mechanics lien deadline: As a contractor, you most likely have a mechanics lien, especially for larger projects. It is important to understand that your retainage and release will not provide an extension on the current mechanics lien. That deadline is a hard deadline that is not related to the retainage and the retention process.
- Retention bonds can help you get paid faster: To maximize your cash flow, the use of retention bonds is an option that many contractors are taking advantage of to guarantee that their teams and subcontractors have enough funds to complete the project at hand (conditional or nconditional bonds). Retention bonds are essentially a security agreement that the contractor and subcontractors working on the project will pay the necessary premiums in exchange for not acting in cash retention. Should the contractor provide less than satisfactory work or abandon the project, the customer can claim the bonds to have the monies repaid.
Get Paid
While retainage aims to ensure quality work, contractors have a right to be paid for the work they are doing, and their subcontractors are completing throughout the project. To provide high-quality work on a public project or private project, the need for materials from suppliers and labor costs will add up.
As a contractor, you can take legal action against an owner if you are not paid for the services you provided. This is also true for subcontractors waiting for payment from the general contractor, who may be withholding the retainage.
FAQs About Retainage
The retainage payment refers to the final payment where all fees retained for the duration of a project are paid to the contractor.
The retainage payment is held by the property owner and then released to the general contractor over the project. Any subcontractors looking to receive payment should be receiving that from the general contractor directly.
Since these funds are expected and are considered profit on the project, they are considered an asset and can be claimed.
If you need to track your retainage as you move through the project, you should record what your retainage percentage is before you move forward and what was taken out of each payment before you received it. At the end of the project, the percentage of the overall project should match what was taken from the payments, equaling your retainage payment.
The retainage fees are not taxable until the project is complete and you have received the payment. When filing with the IRS, you need to note to exclude these funds if they have not been paid.
