Retainage is a percentage of each payment that the GC withholds until project completion. Understanding retainage is essential for cash flow planning and project closeout.
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What Is Retainage?
Retainage (also called "retention" or "holdback") is a portion of each progress payment that the owner or GC holds back until the project issubstantially or finally complete. It's a form of security that ensures contractors complete their work properly.
How It Works
On each pay application, a percentage (typically 5-10%) is withheld:
| Pay App | Work Completed | Retainage (10%) | Payment |
|---|---|---|---|
| #1 | $50,000 | $5,000 | $45,000 |
| #2 | $75,000 | $7,500 | $67,500 |
| #3 | $60,000 | $6,000 | $54,000 |
| Total | $185,000 | $18,500 | $166,500 |
Why Retainage Exists
Project Completion Incentive
Retainage motivates contractors to complete all work, including punchlist items. Without it, there's less financial incentive to finish the last 5% of work.
Protection Against Defects
If problems are discovered after substantial completion, the owner has funds to address them. This protects against contractors disappearing before corrections are made.
Warranty Assurance
Some retainage is held through the warranty period to ensure contractors address warranty issues.
Industry Standard
Common Retainage Rates
| Rate | Common Usage |
|---|---|
| 5% | Lower-risk projects, established relationships |
| 10% | Most common rate for commercial construction |
| 5% reducing to 0% | After reaching 50% completion |
| 10% reducing to 5% | After reaching 50% completion |
What Retainage Applies To
Work Completed
Retainage is always calculated on the value of work completed. This is the primary basis for retention calculations.
Materials Stored
Whether retainage applies to stored materials depends on your contract:
- Some contracts retain on materials at the same rate as work
- Some contracts have a lower rate for materials
- Some contracts don't retain on stored materials at all
Check Your Contract
Reduced Retainage
Many contracts allow for reduced retainage after reaching certain milestones:
50% Completion
A common provision reduces retainage from 10% to 5% (or 5% to 0%) once you reach 50% complete. This improves cash flow in the second half of the project.
How It Works
When you reach the threshold:
- Existing retainage stays in place (not released)
- Future payments have reduced retainage
- Full release happens at substantial/final completion
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Impact on Cash Flow
Retainage significantly affects your project cash flow:
Example: $1 Million Contract at 10%
- Total retainage held: $100,000
- This is money you've earned but can't access
- You must finance this gap with working capital
- Release often takes 30-90 days after substantial completion
Planning for Retainage
- Factor retainage into your cash flow projections
- Understand when release is expected
- Don't count retainage as available cash until released
How RIVET Tracks Retainage
RIVET automatically handles retainage calculations:
- Calculates retainage on each pay application
- Tracks cumulative retainage held
- Supports different rates for work vs. materials
- Handles reduced retainage thresholds
- Projects when retainage will be released
Next Steps
- Learn how retainage is calculated
- Understand the retainage release process
- See how retainage syncs to accounting
Need Help?
If you have questions about retainage or need assistance with your account, contact our support team at support@slpwlk.io.