Retainage is one of the most misunderstood aspects of construction payment. If you've ever wondered why 5-10% of your invoice is being held back, or how to get that money released faster, this guide is for you.
What is Retainage?
Retainage (also called retention) is a percentage of each progress payment that the general contractor or project owner withholds until the project reaches substantial completion. Think of it as a security deposit on your work.
Typical retainage rates range from 5% to 10% of each invoice. On a $100,000 subcontract with 10% retainage, you'd receive $90,000 during the project and the remaining $10,000 only after final completion and approval.
Why Does Retainage Exist?
Retainage serves several purposes for project owners and general contractors.
Quality Assurance
It provides leverage to ensure subcontractors complete punch list items and correct deficiencies. Without retainage, a subcontractor might move to the next job without finishing small details.
Project Completion Incentive
Retainage keeps subcontractors financially motivated to see the project through to the end, not just to substantial completion.
Protection Against Claims
If disputes arise or warranty issues appear, the owner has funds already set aside to address them.
How Retainage Impacts Your Cash Flow
The cash flow impact of retainage is significant and often underestimated.
The Math Problem
On a year-long project with $500,000 in billings and 10% retainage, you're carrying $50,000 in unpaid retainage. That's $50,000 you've earned but can't access — potentially for months after project completion.
The Timing Problem
Retainage isn't released when you finish your work. It's typically released when the entire project reaches substantial completion. If you're an early trade (like concrete or framing), you might wait 12-18 months to collect your retainage.
The Compounding Problem
If you're working multiple projects simultaneously, retainage obligations stack up. Five projects with $30,000 retainage each means $150,000 of your money is locked up.
State Laws on Retainage
Many states have enacted laws limiting retainage practices. These laws typically address maximum retainage percentages allowed, when retainage must be released, interest on late retainage payments, and trust fund requirements for held retainage.
For example, California limits retainage to 5% after 50% completion. Texas requires retainage release within 30 days of substantial completion. Many states require that retainage be held in trust accounts.
Check your state's specific laws, as they vary significantly.
Strategies to Get Retainage Released Faster
1. Negotiate Lower Retainage Upfront
Before signing the contract, negotiate for lower retainage rates (5% instead of 10%) or stepped reduction (10% until 50% complete, then 5%).
2. Request Early Release for Completed Trades
If your scope is finished and approved, request early release of your retainage. Many GCs will accommodate this request, especially for subs with strong relationships.
3. Submit Complete Documentation
Delayed retainage often results from incomplete documentation. Make sure you've submitted all closeout documents: as-built drawings, warranties, operation manuals, lien waivers, and any required certifications.
4. Track the Project Schedule
Know when substantial completion is expected and follow up proactively. Don't wait for the GC to remember your retainage.
5. Invoice Retainage Separately
When the project reaches completion, submit a separate invoice specifically for retainage release. This makes it clear and easy for the GC to process.
Retainage in Your Contract
Pay attention to these retainage provisions in your subcontract:
Retainage Percentage
Is it 5% or 10%? Does it reduce at any milestone?
Release Conditions
What triggers retainage release? Substantial completion of your work, the whole project, or final acceptance?
Release Timeline
How many days after completion before retainage is due?
Disputed Retainage
What happens if there's a dispute about deficiencies?
How SubPaid Helps Track Retainage
SubPaid's AIA billing feature automatically calculates and tracks retainage across all your projects. You can see at a glance how much retainage is outstanding per project, when it's expected to be released, and your total retainage exposure. When it's time to invoice for retainage release, the system generates the appropriate billing documents automatically.
Frequently Asked Questions
Can I charge interest on late retainage?
Check your state law and contract. Some states mandate interest on late retainage payments. Even without a legal requirement, you can negotiate interest provisions into your contract.
What if the GC won't release my retainage?
Document that your work is complete and approved. Send a formal demand letter. If the retainage isn't released within the required timeframe, you may need to pursue lien rights or legal action.
Should I factor retainage into my cash flow planning?
Absolutely. Treat retainage as money you won't have access to until proven otherwise. Plan your cash flow assuming retainage will be delayed, and you won't be caught short.