What is retainage in construction? [best practice + recovery options 2020]

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-Definition (0:18)
Retainage, also called “retention,” is an amount of money “held back” from a contractor or subcontractor during the term of a construction project. Most construction contracts mandate that a certain percentage of the contract price, often 5% to 10%, must be withheld until the entire project is substantially complete. As a result, typically, every progress payment is discounted by 5 to 10%, then the amounts that were withheld during the life of the project are paid out at the end.

-Why is retainage withheld? (0:50)
Retainage is withheld as a way to safeguard against future problems with the project. When there are disputes over the work being done, having a retainage account will help serve as a buffer from unexpected issues.

-How much does retainage amount depend on contract terms? (1:42)
If retainage is not specifically addressed in the construction contract, then it typically shouldn’t be withheld - even where retainage is allowed by law. It’s pretty common for the parties to include some retention provisions within their construction contracts. But, the amount of retainage that can be withheld is often limited by state law - so, it’s not always simply a matter of what’s in the contract.

-Legal limitations on how much and for how long retainage can be withheld (2:07)
A. How much retainage be withheld? (2:07)
On https://www.levelset.com/retainage, you can find the most up to date retainage information.
Public projects will often mirror the retainage limits on private construction jobs in the same state, but not always. Typically, retainage will still max out at 5 to 10% for these jobs. But, to be sure what’s allowable, it’s important to double check your state’s requirements.
For federal construction projects, retainage can only be withheld if it’s specifically addressed in the contract. Again, the maximum here is typically something like 10%.

B. How long can retainage be withheld? (3:24)
First, note that the timeframe for receiving retainage payments will often depend on your role on the project. The timeframe for receiving retainage will depend on when your customer receives payment.
Many states will set deadlines though. For example, a California contractor must release retainage payments to their subcontractor within 10 days of receiving payment, themselves.
Retainage timeframes may also depend on what’s in the contract, although not every state sets a specific timeframe for releasing retainage. As for federal projects - retainage timeframes will depend on what’s in the contract.
By and large, retainage must typically be released to the general contractor shortly after project completion. Usually, this is something like 30 to 60 days after project completion.

How can retainage be recovered? (5:35)
To start, the typical less-formal recovery options will be available. Things like invoice reminders and even demand letters can help to get paid when a customer is slow to release payment.
Making things a little more serious, a threat to file a mechanics lien or bond claim can often work to get payment talks moving in the right direction. Further, a threat to file a lawsuit can do the trick, too. This is especially true in a state that has retainage laws on the books. Typically, those laws will include interest penalties, which raise the stakes for a nonpaying customer.
If necessary, making a formal claim for recovery can get the job done. On privately owned projects, retainage can generally be included in a lien claim. Retainage represents amounts that are owed for work already performed - so, much like any other unpaid amounts, retainage can typically be liened.
The same is true for bond claims on both state and federal projects. Bond claims may typically be filed for retainage recovery.
Finally, note that a lawsuit is always an option, albeit a fairly undesirable one. When retainage hasn’t been paid, as required, a claimant will typically have some legal options at their disposal - like a lawsuit under their state’s prompt payment laws, retainage laws, or under a theory like breach of contract.

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