Retainage
A percentage of each progress payment the owner withholds from the contractor as security until project completion.
Definition
Retainage (also called retention) is a percentage of each progress payment that the owner withholds from the contractor as security to ensure the contractor completes the work and corrects any defects. A typical retainage rate is 5 to 10 percent on each payment application, released either at substantial completion or in stages as milestones are met.
Retainage flows down the contracting chain — the contractor withholds retainage from subcontractors at the same rate the owner withholds from the contractor, and so on.
How retainage is used in estimating
For estimators, retainage is not a cost but a cash-flow factor that has to be modeled into the project. On a $5 million job with 10 percent retainage held until substantial completion, the contractor is financing $500,000 of receivables for the duration of construction. That financing cost should be reflected in the bid through general conditions or markup, especially on long-duration projects.
Many states regulate retainage on public projects with maximum percentages (often 5 percent) and required release schedules. Some states allow contractors to substitute securities (like a bank letter of credit) in place of cash retainage. Sophisticated contractors negotiate reduced retainage at 50 percent completion or eliminate retainage entirely on the final stages of long projects to improve cash flow.
How retainage affects cash flow
Retainage delays cash receipt and can stress contractor working capital. On a project where the contractor’s margin is 5 percent and retainage is 10 percent, every progress payment essentially defers more than the entire project profit until final payment. Estimators need to factor this into project pursuit decisions, especially for younger firms with limited working capital. Negotiating retainage reduction at milestones is one of the highest-leverage contract-term changes a contractor can win.
Frequently asked questions
Q.What is a typical retainage percentage?
Five to ten percent of each progress payment is typical. State law on public projects often caps retainage at 5 percent. Private contracts vary more widely.
Q.When is retainage released?
At substantial completion of the project, often after a punchlist period and after the contractor delivers final lien waivers and warranties. Some contracts release a portion at substantial completion and the balance at final completion.
Q.Does retainage flow down to subcontractors?
Yes. The contractor typically withholds retainage from subcontractors at the same rate withheld by the owner. Retention flows through the entire contracting chain.
Q.Is retainage a cost?
It is not a cost in the accounting sense — it is the contractor’s own money being held back. But the working-capital impact is real and should be modeled in the bid markup, especially on long jobs.
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