What is Retainage in Construction: A Comprehensive Guide
In the construction industry, retainage refers to the practice of withholding a portion of payment until the completion of a project. This concise guide aims to explain the concept of retainage, its benefits, and the conditions under which it is commonly used. Whether you are a contractor, subcontractor, or project owner, understanding retainage can greatly benefit your construction endeavors.
I. Understanding Retainage in Construction:
- Definition: Retainage is a percentage of the contract price that is held back from payment until the project is finished, serving as a form of financial security.
- Purpose: Retainage ensures that contractors and subcontractors fulfill their obligations, encouraging timely completion and quality workmanship.
II. Benefits of Retainage in Construction:
- Retainage acts as a safeguard against potential contractor or subcontractor default.
- It provides a reserve fund to address any unforeseen issues or deficiencies that may arise during the project.
- By tying payment to project completion, retainage incentivizes contractors to meet project specifications, deadlines, and quality standards.
- It encourages accountability and reduces the likelihood of incomplete or subpar work.
For example, if the complete project cost is $200,000 to be paid in five progress payments and the percentage to be retained is 5%, the calculation would be as follows: 200,000 x 0.05 = 10,000 total retainage amount. 10,000 divided by 5 = 2,000 retainage withheld from each progress payment.
What does 10% retention mean?
So on a $100,000 contract with 10% retainage, the contractor doesn't have to fork over ten grand at the beginning. Instead, the contractor will deduct the retainage from each payment application. If that contract is paid out over 10 progress payments, $1,000 would be held in retention from each one.
Why do owners insist in retainage?
Retainage serves two general purposes:
To provide an incentive to the contractor or subcontractor to complete the project
. To give the owner some protection against problems like liens, contractual defaults, delays,etc.
What is an example of a retainage?
Retainage works by removing a percentage of money from each payment owed to a contractor. For example, if you're working under a $50,000 contract with a retainage percentage of 5%, the total amount retained will equal $2,500. However, retainage isn't typically withheld all at once.
How do you release retainage?
Retainage is a percentage of the contract amount that is held until a specific date after the completion of the work. You release retainage by creating a voucher pay item with a Pay Status of A (Available to Pay) for the amount that you want to release. The retainage amount is also referred to as holdback.
What is the purpose of retainage?
What is Retainage? Retainage is the withholding of a portion of the funds that are due to a contractor or subcontractor until the construction project is finished. It is meant to serve as a financial incentive and an assurance that the contractor will complete the project in a satisfactory manner.