As a construction business owner, you may not like the idea of having money withheld from your finished projects, but it’s a reality that you’ll have to face at some point. Retainage can motivate you to do your best work and even turn into a kind of savings plan with interest for future projects, but it also poses some challenges that can cause problems when not handled well.
The concept of retainage is fairly simple: withholding a percentage of the project total until the project reaches substantial completion. This practice is often dictated by local and state laws, as well as specific contract terms.
Generally speaking, withholding retainage payments trickles down to subcontractors from the general contractor, who in turn will have their own contract terms that stipulate how much and for how long. This can create a chain of payment that can be very difficult to navigate, especially for small and newer construction companies that may not have the cash reserves to hold out until they receive their retainage payments.
Keeping track of how much retainage is being withheld is crucial for ensuring that you’re able to manage cash flow. Some contracts or regulations may also include caps on the percentage of the project that can be withheld or conditions for when it must be released, so be sure to always refer back to your contract and any relevant laws and standards to ensure correct calculation and compliance.