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So that their investment is protected until the project meets contractual requirements. Retainage (or retention) is one of the biggest culprits of cash flow issues for construction companies—especially for subcontractors. It’s a long-standing construction payment policy that allows project owners and general contractors to hold back part of the money you’ve earned until the project is complete.

The Basics of Construction Retainage

Subcontractors and other down-the-chain participants have gripes about retainage – with good reason. Retainage practices are problematic because they cause practical issues and business relationship issues within the already-complicated accounting and payment systems of the construction world. Click here to see Retainage rules, info, and FAQs for all 50 states, and you can also take a look at the map below to see an overview of the requirements in your state.

• Substantial completion causes a broader problem because it’s so hard to nail down.
• Began to withhold 20% of contractors’ payments as security to ensure a project’s completion.
• However, allowing clients to hold on to retained funds after project completion is highly risky, as there is a chance they could try to evade final payment.
• This type of insurance covers the cost of replacing rented tools and equipment if they get…
• Variable retainage changes the percentage of retained funds as a job moves forward.

Set Job Site for Accurate Rates

• Retainage, also called retention, is an amount withheld from the contractor until a later date.
• The next question is whether the withheld retainage should be included in a lien filing.
• Second, it’s abused by holding money too long or withholding high percentages.
• All 50 states allow for retainage on public works projects, but amounts can vary from state-to-state.

This is done to “stay ahead” of the subcontractor, to further protect the owner or GC. You should check out the payment reputation and practices of your contractor to see whether anyone reports them engaging in this abusive practice. But because retainage is often held until retainage in construction the very end of the project — well after the subcontractor has left the job — it can cause a dilemma. Mechanics lien laws have specific deadlines that contractors must follow.

Challenges of Retainage: How Retention Impacts Contractors and Subcontractors

If you’re owed retainage, the held-back amounts should be recorded as an asset, while whoever owes retainage should enter the amount as a liability. Retainage receivables will show as a debit balance, while retainage payables are considered a credit. While joint checks and joint check agreements are common in the construction business, these agreements can actually be entered into… Perhaps you can offer a letter of credit or a surety bond to substitute for the retainage requirement. There is even such a thing as a “retainage bond.”  This type of negotiation is probably going to be difficult, but it never hurts to ask, and your company’s goodwill has value.

Unpaid Retainage

The retention payable serves as the final settlement, marking unearned revenue the conclusion of financial dealings for the project. In some rare circumstances, withholding money from contractors can actually be required by state law. For example, according to retainage rules in Texas, the property owner must retain 10% on private construction projects. Under New Mexico’s rules, by contrast, withholding retainage is prohibited. Retention in construction is a vital mechanism to balance trust and accountability between project owners and contractors. While it offers significant benefits, managing retention effectively is crucial to avoid cash flow issues and disputes.

Final Takeaways

• That is, when contractors receive their progress payments throughout the course of the project, the retainage fee percentage is held back each time.
• It provides project owners with a financial buffer against potential risks, such as incomplete work, delays, or defects.
• There is even such a thing as a “retainage bond.”  This type of negotiation is probably going to be difficult, but it never hurts to ask, and your company’s goodwill has value.
• On average, that means that general contractors wait about 99 days to get withheld money, and subcontractors (who likely finish before the general contractor) wait an average of 167 days.
• This typically includes resolving any punch list items or defects and meeting all contractual requirements.

Kelsie holds a Masters of Business Administration (MBA) and has close to a decade of experience in construction accounting and finance. These challenges affect new and small businesses more significantly than their larger, more established counterparts because they usually don’t have the financial safety net. Nonetheless, retainage does put a strain on small and large contractors alike. If you want to ensure that you receive your portion of the payout in a timely manner, make sure it’s Law Firm Accounts Receivable Management in the agreement. If it is included in the agreement, a client may be able to withhold funds.

Every single one of the 50 states allows retention to be withheld on a public works project. However, each state has different rules and limitations that govern the practice. Retainage can significantly impact cash flow for both contractors and subcontractors. When retainage is withheld, it reduces the amount of cash available for operating expenses. Retainage, also known as retention, is a practice where a portion of a contractor’s payment is withheld until project completion.

Retainage in the Construction Industry: A Guide for Contractors

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• The practice is also baked right into laws all across the world that regulate the types of contractual provisions that contractors can agree to.
• This is a very unique practice specific to the construction industry, but within the industry, it’s extremely popular.
• In this scenario, ACME is going to be in the red on this project to the tune of -3% until they finally receive their retainage withheld.
• Retention in construction refers to a portion of the payment withheld from contractors or subcontractors until project completion.

Do the math (i.e., do a project cash flow forecast) and make a plan to have access to the working capital required to “float” the withheld money. When you’re entering into a contract for a project where there will be money withheld, make sure you examine the terms to find out everything you possibly can about how the retainage will work. retainage 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.

What is Retainage in Construction? Understanding Its Purpose and Impact on Projects

Retainage is an additional layer of complexity that contractors must learn to navigate. Having a clear understanding of what’s considered acceptable—as well as what’s not—will help you set boundaries and protect your interests. Yes, this will raise the contract amount for your clients, but it is an effective way to ensure you have enough capital to work with. In some cases, this may also sway clients to waive retainage altogether. Retainage doesn’t typically affect the payment cycle, as that will have been determined in advance and specified in the contract.

Challenges of Retention in Construction

Construction retainage impacts cash flow and can throw a wrench in your project budget if you aren’t prepared. For each project, the payment schedule and amounts are dictated by the contract. They may Partnership Accounting sound like the same thing, and essentially they are, but some owners have been known to use the terms to reduce the amount of upfront payment to save themselves money.

What’s the Difference Between Retainage and Retention?

• For instance, an agreed-upon rate of 10% might be reduced to 5% once a job crosses the halfway point.
• Since all payment processes, including contracts, invoices, and purchase orders, are managed within the platform, tracking retention becomes effortless.
• This approach helps maintain contractor motivation to meet contractual obligations.
• When recording retainage for bookkeeping, it’s important to distinguish between retainage receivable and retainage payable.
• It’s important to note that mechanic’s liens are often handled differently in public projects vs. private projects.
• Don’t hesitate to clarify things with your legal department or a qualified construction law attorney – you’ll thank yourself later.

Construction contractors face potential losses with each project they take on. To mitigate the financial consequences of catastrophic project losses, businesses use construction project loss insurance (PLI). Some jurisdictions set limits on the amount of money that may income statement be retained on payments, how that money must be held, and which types of projects are allowed to use retention in the first place. The sector’s boom led to hundreds of new construction companies entering the market to capitalize on the opportunity. In Iowa, a contractor may request the early release of retainage on a public project.