An owner may resist such language, taking the position that the contractor, rather than the owner, is in a better position to facilitate obtaining a use and occupancy permit. When you’re starting out, retainage can be especially burdensome on your operations, especially on large-scope projects. https://www.bookstime.com/ To counterbalance the strain retainage causes on your finances, establish cash reserves and a savings account as soon as possible. This can help ensure you have additional funds you can dip into when needed—for instance, when clients try to withhold funds after project completion.
How long is retainage withheld?
If retainage is withheld for months or even years after work on a project is completed, you’ll be forced to find other means of financing projects while you wait to recoup the retainage. Put simply, retainage in construction is a percentage that’s held back from the earnings of a contractor or subcontractor during the length of a project. The specific amount is specified in the construction contract and is usually anywhere from 5 to 10 percent of each progress payment, depending on the type of project. Traditionally, owners will hold retainage until the contract has been fully executed. A satisfied contract, however, doesn’t mean retained money will hit your bank account as soon as the project ends.
Retainage, Lien Rights, & Payments Rights Conflict to Give Contractors Difficult Choices
The contractor will put retainage in line 5 of the application for payment. This line has separate amounts for retainage on completed work, and retainage on stored materials (materials that you have purchased but not used in the project yet). That way the contractor can calculate the two separately in case they are working under variable retainage. The contractor should fill in the percentage and multiply it by the value of work or materials, respectively. 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.
Factor it into your cash flow needs
If you have an in-house accountant, consider creating a contingency or emergency fund. This reserve of cash can be used to help supplement cash shortages created by retainage. In the unfortunate event that you never receive your retainage payments, this fund can be a lifesaver, helping you bear the brunt of lost income without retainage in construction it wreaking havoc on your operations. The truth is that retainage has remained a legacy practice of a construction era long forgotten. Whether you agree with it or not, it’s not going anywhere any time soon, which means contractors must understand its benefits and drawbacks so they are better prepared to encounter it.
Track Your Retainage Payments
While retainage refers directly to the sum of money withheld, retention is more about the process of withholding that money. In this article, we use both terms to refer to the same thing – withheld money. When setting a retainage percentage, there are a few factors that are essential to consider, specifically, in construction. Contracts are determined through negotiation, reflecting project complexity, industry standards, and regulations, all of which will be reflected in the percentage. For instance, if the total contract is $100,000 with a retainage rate of 5%, $5,000 would be withheld as retainage. Contractors receive the retainage once the project is finalized and any necessary corrections are made.
If, after the inspection, no defects are found or if the defects have been corrected within the allowed time frame, then the owner must release withheld retainage fees. The use of retainage also depends on the type of project and its complexity. For example, smaller residential projects may not include retainage, while larger commercial or public projects usually do.
How much is withheld?
One notable exception is the State of New York which amended their lien laws to make sure that those forced to file a mechanics lien would not lose out on their rights to the portion of the payments withheld as 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.
- In some cases, it changes as work is completed – it may start at 10%, then reduce to 5% after the project is halfway done.
- On large projects, if you were one of the first contractors working on the project, you could end up waiting years for your retainage billing.
- Once the project is complete and you’re billing your customer for the retention that was held throughout the project, the amount then moves from retention receivable to accounts receivable.
- 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.
- The retainage is usually paid to the contractor, who subsequently distributes it to subcontractors after the project is fully completed.
- When examining and agreeing to a budget for your next construction project, whether public or private, there are certain factors to consider as a contractor.
When is retainage paid on a construction project?
- The method is also codified in laws worldwide that govern the contractual stipulations that contractors can agree upon.
- In this phase, the amount of money held back is decided, usually between 5% and 10% of the total contract value.
- It’s important to pay close attention to the requirements and rules.
- But, did you realize that it’s sometimes required to send specific notices and legal documents to maintain your rights to claim retainage?
- In some cases, clients may add these terms to the agreement to ensure they’re satisfied with the finished project.
- It’s better to know if this is a likelihood up front so you can prepare.
- Things can easily be forgotten, misremembered, or misunderstood, so keeping written documentation of communications, invoices, and receipts is a must.
- If, after the inspection, no defects are found or if the defects have been corrected within the allowed time frame, then the owner must release withheld retainage fees.
- In the private sector, for any work that’s eligible for a mechanic’s lien, the project owner is required by law to retain 10% of either the contract price or the value of the work completed.
- This post covers the certified payroll requirements for contractors working on federal construction projects.
- Once you know what you’re getting into, and once you’ve exhausted all of your alternatives, then you can plan for the cash flow reality.
- Note that retainage may be used interchangeably with retention or progress payment when referring to money withheld on construction contracts.
- Some states have vague regulations, such as requiring that withholdings be “reasonable.” You need to consult the rules in your state — take a look at the retainage map to see what the rules are in your state.