Retainage in Construction Overview, Rules & FAQs

The practice effectively put the contractor’s profit at risk rather than the investor’s money, increasing the incentive to execute the project well and disincentivizing underbidding. The practice started in the 1840s with the United Kingdom railway system. Increasing railway construction demand led to a flood of new contractors, many of whom were inexperienced and presented great financial risk to railway companies.

Helping Thousands of Contractors Like You With Retainage

Retention payable is recorded by owners and general contractors and is the amount owing to contractors or subcontractors for retention. Since these funds aren’t due until the project is completed, they are recorded in a separate account on the general ledger. On public construction projects in California, like state or municipal jobs, retained funds are limited to 5% or less prior to completion and acceptance of the project.

How long is retainage withheld?

The contracts underlying a construction project form the basis of the relationships between… However, the practice is controversial, and many argue that it compounds the construction industry’s working capital and cash flow challenges, thus creating more problems than it solves. Generally, withholding amounts in a construction contract that violate state-imposed limits will https://www.bookstime.com/ be rendered invalid. By tracking the amounts owed for retention, companies can make plans on how to collect overdue payments based on the amount of risk involved. Northeastern Subcontractors Association, Inc. (NESCA) is a non-profit trade association representing over 500 Northeastern New York subcontractors, specialty contractors and material and equipment suppliers.

• In fact, there are very few instances when the laws are in agreement in every state, but this is one of those instances.
• Variable retainage changes the percentage of retained funds as a job moves forward.
• Especially when we factor in the potentially long lead times to receive payment.
• If you lack the finances to purchase materials and equipment while you await your retainage payments, contractor financing can enable you to operate and grow your construction business with greater ease.
• This might harm meaningful subcontractor relationships, and it may be challenging to find individuals willing to work with such a high retainage percentage.

Learn How the State and Federal Laws Work and the Contractual Details of the Project You’re Working On

• Disreputable clients and contractors engage in predatory or malicious actions.
• The federal government has enacted laws governing retainage on federal projects, and there are differing state laws governing the details of retainage on both public and private projects.
• The first and most important thing to make clear is that in most jurisdictions, retainage is negotiable.
• Say a general contractor has billed its customer $100,000 for a project.
• Most payment applications will include specific fields and guidelines to help you calculate payments with retainage included.
• The average amount of retainage withheld on private jobs is 7.59%, on state jobs is 5.56%, and on federal jobs is 3.26%, with higher percentages withheld from subcontractors than from general contractors.
• Some contracts allow contractors to apply for early payment of some retention funds.

Now that we’ve explored where this practice comes from and why it exists, let’s dig into some of the rules of the game, and how it may impact your project and your pocketbook. Various circumstances determine retainage holding length, but most conditions are based on milestone accomplishment. This frequently includes the number of milestones and client satisfaction for each one. We are a subcontractor in Colorado, we entered into a contract for $43K. The contract that was signed states that retainage will be 10%, however… Use our color coded map to learn about the retainage requirements that may affect your next job.

There is a defects liability period clause – 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. There is a retention clause in construction contracts that describes the amount that is retained, along with when and how will this withheld amount be paid back to the contractor. So, a payment bond is a surety bond secured by a surety company that has guaranteed finances to secure the value of the project. If GC, subcontractor or material supplier are not paid after the successful completion of the project, they make a claim for payment against the payment bond and get their retainage fee back from the payment bond securities.

AIA G702-1992: Application for Payment

Looking to fill this demand, project owners had no choice but to bring on large amounts of inexperienced workers and contractors. As a result, many projects failed to meet expectations or weren’t finished at all. While highly divisive, retainage remains a construction industry standard. You must be diligent with your contracts, become familiar with state laws, plan for cash flow needs, and consider financing options to better confront the impacts of retainage.

What is retention?

If you do go this route, you’ll need to make sure you do your homework and have plenty of supporting documentation and evidence to support your lien actions. As always, consult with a lawyer before signing contracts or enacting your lien rights. The American Institute of retainage in construction Architects (AIA) offers standardized pay app templates that provide convenient guidelines for getting these numbers right. For example, the G702 and G703 AIA-style documents include sections that prompt you to determine the actual amount that you receive minus retainage.

In this article, we’ll discuss everything you need to handle your next retainage contract with confidence. When you’re in construction project management, it’s helpful to manage your relationships with clients through construction management software. If we follow generally accepted accounting principles (GAAP), once your retainage payables are invoiced, they’ll move to accounts or subcontract payables. Likewise, retainage receivables move to accounts receivable when billed.

California Retainage Rules & FAQs