Cash flow is a major concern for construction businesses. Whether they are a general contractor working on smaller projects for private clients or larger public projects, these companies must carefully manage cash flow to ensure that their costs are covered and they receive payment on time. In order to do this, it is important for these businesses to understand their rights and options when it comes to negotiating with clients about how to handle retainage payments.
Retainage is an industry term that refers to a percentage of each payment being withheld until certain conditions are met. It is typically set out in the contract and can range from 5% to 10% of the total project budget. It may also be scalably defined with different percentages being withheld for each project phase. It is important for contractors to understand how this is calculated in order to prepare a proper estimate.
While retainage is a standard practice, that doesn’t mean it is always used fairly. In fact, unscrupulous owners and general contractors have been known to weaponize retainage and force subcontractors into doing work that is out of scope or simply using retained funds as their own. As a result, it is important for contractors to know how to calculate retainage in order to protect their bottom lines.
Retainage is usually released once the work meets the specified contract requirements and has been inspected and accepted by the project owner, architect, engineer, or third-party inspector. In addition to these requirements, some contracts require the contractor to submit documentation such as warranties, operation and maintenance manuals, and as-built drawings before the retainage can be released.