Retainage

Retainage (also called retention) is the portion of a contractor's earned payment that the owner holds back until the project reaches substantial completion or final completion. On a typical commercial project, the owner withholds 5-10% of each progress payment. So if you bill $50,000 for this month's work, you might only receive $45,000, with $5,000 held in retainage.

The purpose of retainage is to give the owner financial leverage to ensure the contractor finishes the job and addresses any punch list items. It also provides a buffer if the contractor defaults or if defects are discovered. Retainage has been standard practice in construction for over a century.

Retainage typically flows down the chain. The owner withholds from the GC, the GC withholds from subs, and subs may withhold from their suppliers or lower-tier subs. When the project is complete and the owner releases retainage to the GC, the GC should release retainage to the subs. Many states have laws governing retainage — some cap the percentage, require it to be held in escrow, or set deadlines for release after substantial completion.

Retainage has a real impact on your cash flow. On a $500,000 contract with 10% retainage, that's $50,000 you won't see until the project wraps up — which could be months or even a year away. You need to account for this gap in your cash flow planning. Many contractors have run into serious financial trouble not because they weren't profitable, but because too much of their money was locked up in retainage across multiple projects.

Also watch for retainage abuse. Some GCs hold retainage longer than they should or try to use it as leverage for unrelated issues. Know your state's retainage laws and don't be afraid to assert your rights.