Last edited 20 Dec 2020

Retainage in construction

In the United States, retainage is an amount of money withheld from progress payments to ensure that the construction work is completed. It acts as an incentive for the supply chain to fulfil all of their obligations under a contract, and provides a reserve of money to be drawn on if they do not complete and have to be replaced. The UK equivalent is known as ‘retention’.

Clients can retain money from main contractors who can in turn retain money from subcontractors who can retain from sub-subcontractors, and so on.

The amount of retainage varies according to the project and the region but it is calculated as a percentage of each interim payment. Typically 5-10%, the exact amount, and conditions for its release, can be negotiated between owners, contractors and subcontractors prior to signing contracts. Public projects often require retainage to adhere to state laws.

Whilst retainage is usually only a small portion of the payments made as the work is carried out, it can amount to a sizeable total value that can be a strong incentive to complete. However, it also creates cash flow problems for the supply chain, and can take a long time to release. As a result retainage has come under some criticism.

It is important that retainage is a fair amount, and that it is equitable, that is, that the amount withheld from subcontractors by the main contractor should not be greater than the amount withheld from the main contractor by the client. In addition, clients should release the retainage promptly once the work has been completed and accepted; and similarly, the main contractor must make prompt payment of the retainage to subcontractors.

In some contracts, the percentage of retainage will decrease as the work progresses to reflect the fact that the likelihood of failure to complete has also decreased. If payments are not made promptly, interest may be charged.

As an alternative to retainage, the contractor may deposit securities, and any interest accrued is then paid to the contractor.

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