Everything You Need to Know About Retainage for Construction Contracts
As part of the construction industry, you must navigate the ins and outs of complex laws, regulations, and deadlines as defined in your construction contract. Retainage is one of the many terms you need to be familiar with to be sure you and your employees get paid for a job well done.
Overview of Retainage Laws
A portion of the project’s final payment is withheld from the contractor until the full completion of the work —that is retainage.
Retainage usually amounts to 5% to 10% but can vary based on the contract terms. Because this is often a good portion of the contractor’s profits, it’s used by the client as a security measure to ensure a project is fully complete with good quality craftsmanship.
Frequently Asked Questions About Retainage
Retainage gets a little tricky because of the various state and federal laws, limits, and regulations —not to mention these are subject to change based on the job type as well. Without proper management and specialized industry knowledge, your business is at risk of losing funds and withholding money improperly.
Now that you know what retainage is, let’s dive into the most commonly asked questions so you’re prepared to manage your contracts a little easier.
Why is retainage important?
In theory, withholding funds in this way promotes a fair trade of services and holds both parties
accountable for the completion of the job. This is primarily beneficial to the client to ensure all work is completed adequately.
Who is subject to retainage in a construction contract?
The owners, general contractors, and subcontractors all play a part in withholding retainage. The
owner will withhold funds from the contractor, and often the contractors will also include a retainage from the subcontractors to better manage funds and incentivize the completion of the project.
How is retainage calculated?
Both parties agree upon a percentage defined in the contract that is to be withheld from each payment throughout the project, rather than all at once.
Is retainage negotiable?
Negotiation is always an option. Some contractors opt for negotiating a variable retainage, which could mean the amounts withheld reduce over the course of the project or a different rate applies to labor and material costs to free up funds for upfront costs.
What are retention bonds?
Retainage may cause contractors to suffer from cash flow challenges that could slow work. That’s why you must factor retainage into your construction accounting. It’s important to know what tools are at your disposal to prevent potential cash flow shortages or delays to your third-party labor payments and material purchases. Retention bonds give you access to funds when cash flow is tight.
How Outsourced Accounting Helps With Retainage
Having a good financial management team on your side with access to powerful technology will drive growth and increase your construction firm’s profits. With help from our team at Lescault and Walderman, you’ll easily manage complex construction projects and be better prepared for retainage —or leveraging negotiations to your contract terms.
Learn more about how our construction industry experts are building better accounting workflows, by contacting us today. Schedule your free introductory call to start growing your bottom line.