Glossary
Retainage
Retainage (also called retention) is money earned but not paid: the owner withholds a set percentage (historically 10 percent, now more often 5 percent) from each progress payment and releases it at substantial or final completion. It is not a fee. It is your revenue, deferred.
Retainage is separate from bonding. A performance bond protects the owner against default; retainage protects it against punch-list and closeout risk while giving the contractor a reason to finish.
The short version
- Retainage is a working-capital cost. On a 5 percent retention, roughly a twentieth of the contract sits unpaid for the life of the job.
- Most states now cap public retainage by statute, commonly at 5 percent, and many require a reduction at 50 percent completion.
- Retainage flows down. Whatever the owner holds from you, you likely hold from subs, and state law often limits that too.
- Release is usually tied to substantial completion, certified payrolls being current, lien or claim releases, and closeout documents.
Why it matters to a bidder
Retainage is a financing question disguised as a contract clause:
- Price the carry. On a $3 million contract with 5 percent retention held for 14 months, you are financing roughly $150,000. At a real borrowing cost, that is a line item, not a rounding error.
- Check for a reduction trigger. Many state statutes require retainage to drop or stop accruing at a completion milestone. If the solicitation is silent, ask.
- Ask about securities in lieu of retainage. A number of states let the contractor substitute securities or an escrow account and collect the interest.
- Closeout discipline gets you paid. Most late retainage releases are caused by missing as-builts, O&M manuals, warranties or final certified payrolls, not by disputes.
A real example
A mechanical contractor finishes its scope on a school addition nine months before the project reaches final completion. Its 5 percent retention, about $92,000, is held that entire time because the owner releases retainage only at overall final completion and the general contractor's site work is delayed. The mechanical firm carries the balance on its line of credit. Its bid did not include that cost. Its competitor's did.
How state and local differs from federal
Federal construction contracts do not use a fixed statutory retainage percentage. Federal policy discourages routine retainage and permits it only when the contracting officer determines it is necessary to protect the government, with the amount based on an assessment of past performance and the likelihood of satisfactory completion. Many federal contracts carry none.
State and local practice is the opposite: retainage is standard and is governed by state statute, which is where the specifics live. Most states now cap public retainage (5 percent is the most common ceiling), and many require reduction or release at substantial completion, mandate payment of interest on wrongly withheld retainage, or require the prime to release a sub's retainage within a set number of days of receiving it. Some states also regulate retainage on subcontracts directly. The numbers differ enough between neighboring states that a multi-state contractor should price retainage per state, not per company.
Common questions
Is 10 percent still normal?
Less often. Most states now cap public retainage at 5 percent, and many require a further reduction at a completion milestone.
Can I get retainage released early?
Sometimes, at substantial completion or on a partial release for completed scopes. Many state statutes provide for it; the contract has to be read alongside the statute.
Do I have to hold retainage from my subs?
Only what the contract and state law allow. Several states limit sub retainage to the percentage the owner holds from you and require prompt release after you are paid.
What is securities in lieu of retainage?
A statutory option in some states letting a contractor deposit securities or set up an escrow instead of having cash withheld, with the contractor earning the interest.