Definition
Retainage is a construction contract term referring to a percentage of a contractor’s payment that is temporarily withheld by the client until the completion of construction or an agreed-upon milestone. This mechanism provides financial leverage to ensure that the contractor completes the project to the required standards and meets all contractual obligations.
Examples
- Public Infrastructure Projects: In a government-funded highway expansion project, 10% of each contractor’s invoice may be withheld as retainage. This amount will be released only after the highway is completed and reliably assessed for compliance with specified criteria.
- Residential Home Construction: In building a new residential home, a homeowner may hold back 5% of the total contract value until the house is completely finished and passes the final inspection performed by a building inspector.
- Commercial Development: A commercial property developer might retain 8% of payment until the contractor has finished all construction and addressed any deficiencies identified in the snag list.
Frequently Asked Questions
What is the typical percentage that is held as retainage?
The typical retainage percentage ranges from 5% to 10% of each progress payment. However, the exact figure can vary based on the specific contract terms.
When is retainage released to the contractor?
Retainage is released once the project has been satisfactorily completed and meets all specified conditions, which may be upon final inspection or after any punch list items are resolved.
Can retainage hurt a contractor’s cash flow?
Yes, retainage can impact a contractor’s cash flow since a portion of their earnings is withheld until project completion. Contractors need to plan financially to mitigate this impact.
How is the retainage amount determined?
The retainage amount is typically agreed upon during contract negotiations and is outlined within the contract terms. It’s a fixed percentage of each progress payment.
Is retainage applicable to all types of construction projects?
Retainage is commonly used in both public and private sector construction projects. However, its application depends on the specific contract agreements between the client and the contractor.
Are there legal limitations on retainage?
Yes, various jurisdictions have specific regulations regarding retainage, including limits on the percentage that can be withheld and the conditions for its release.
Related Terms
Construction Contract
A legal agreement between a contractor and a client specifying the terms and conditions for the construction project, including timelines, payment schedules, and quality standards.
Punch List
A document listing deficiencies and incomplete tasks remaining at the end of a project, which the contractor must resolve prior to final payment release.
Progress Payment
Interim payments made to a contractor for work completed to date within a construction project as per the agreed schedule.
Online Resources
- American Institute of Architects (AIA)
- Construction Financial Management Association (CFMA)
- Construction Industry Development Board (CIDB)
- National Association of State Contractors Licensing Agencies (NASCLA)
- Construction Law on Justia
Suggested Books for Further Studies
- “Construction Contracts: Law and Management” by Will Hughes and Ronan Champion
- “Construction Accounting and Financial Management” by Steven J. Peterson
- “Construction Law for Design Professionals, Construction Managers and Contractors” by Justin Sweet and Marc M. Schneier
- “Practical Guide to Construction Contract Surety Claims” by William Schwartzkopf
- “Construction Law and Dispute Resolution Practice” by Edward Banyard Smith
Fundamentals of Retainage in Construction Contracts: Construction Management Basics Quiz
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