Retainage: the money you earned but can't touch yet

Retainage is the share of each progress payment that the owner or general contractor holds back until the project, or your part of it, is complete and accepted. It exists to protect the owner against unfinished or defective work. For the contractor, it means a slice of every dollar you bill sits in someone else's account until the job closes out, which can be months after your crews have left.

On a thin-margin job, retainage can be the whole margin. This guide covers how it works, where the rules come from, why it squeezes cash so hard, and what experienced owners do about it.

How retainage works

• The contract sets the percentage. Figures in the 5 to 10 percent range are common, but the number is whatever your contract says. Read it.
• It is withheld from every progress payment. If you bill for work in place, the payment you receive is that amount less the retainage percentage.
• Some contracts reduce it at a milestone, often substantial completion or a stated percentage of completion. Others hold the full amount to the end. Many are silent, which means the full amount is held unless you negotiate otherwise.
• Release depends on closeout. Final completion, punch-list sign-off, as-builts, warranties, operation manuals, final lien waivers from your subs and suppliers, and sometimes consent of your surety. Any missing document can hold the whole release.
• As a subcontractor, you are usually on the GC's schedule. The GC generally cannot release your retainage until the owner releases the GC's, and the GC's closeout with the owner may have nothing to do with your scope.

Where the rules come from

Retainage is governed first by your contract and second by law.

• Public work is often regulated. Many states cap the percentage on public projects, require it to be reduced after a point, require it to be held in an interest-bearing account, or require release within a set time after completion. Federal construction contracts handle retainage differently again: the contracting officer may withhold it when there is reason to, rather than as a fixed percentage from the start.
• Private work is regulated in some states and not in others. Where there are rules, they often cap the percentage or set a deadline for release after completion.
• Prompt-payment laws in many states set deadlines for paying progress payments and retainage once they are due, with interest for late payment.

The rules differ from state to state and change over time, so treat any summary, including this one, as a pointer. Ask your attorney or your state's contractor association what applies to the project you are bidding, and keep a copy of the statute with your contract file.

Why it squeezes cash so hard

You pay labor, materials, equipment and your own subcontractors in full as the job goes. Retainage is taken off the top of what comes back. Consider a job where your margin after all costs is close to the retainage percentage: you will finish the work having been paid roughly what it cost you, and your entire profit arrives, if everything goes well, months later at closeout. Meanwhile the next job needs mobilizing with cash you do not have yet.

Stack three or four jobs with retainage outstanding and the sum can be a large share of your working capital, all of it earned, none of it available.

What owners do about it

1. Read the retainage clause before you bid, and price the cost of waiting into the job. If you will carry a slice of the contract value for several months past completion, that has a cost. It belongs in your number.
2. Negotiate before you sign. Ask for a reduction at substantial completion, for release of retainage on completed and accepted phases, for retainage to be held only on labor rather than on materials, or for a lower percentage. Owners and GCs refuse often, but they do not refuse always, and a signed contract is the wrong time to ask.
3. Match your subcontracts. Whatever retainage is held on you, hold the same on your subs, and make their closeout documents a condition of release. Holding less on your subs than is held on you means funding the difference yourself.
4. Know the rules for the job. If a statute caps the percentage or sets a release deadline, you want to know before you are owed the money, not after.
5. Run closeout as its own job. Assign someone to the punch list, the as-builts, the warranties and the lien waivers the day you reach substantial completion. Every week of closeout delay is a week of retainage you are financing.
6. Protect your rights. Lien rights on private work and payment bond rights on public work have notice and filing deadlines that run from dates on the job, not from when you decide to act. Know the deadlines for each project before you need them.
7. Fund the gap deliberately. A line of credit or working capital can carry payroll while retainage is outstanding. Compare the total cost over the months you expect to wait against the margin on the job, and size it to the gap rather than to the whole contract.

Before the next bid

Make a one-page retainage sheet for every job: the percentage, the reduction terms, the release conditions, the statute that applies, and the date you expect release. Add them up across the company each month. That total is money you have earned and cannot use, and seeing it in one place changes how you bid the next one.

The Float is general information, not legal or financial advice. Retainage, lien and prompt-payment rules vary by state and by project type; read your contract and confirm the current law with your attorney.