Retained money is usually withheld from all parties until the very, very end of the project. On average, that means that general contractors wait about 99 days to get withheld money, and subcontractors (who likely finish before the general contractor) wait an average of 167 days. For a variety of reasons, it’s common for retained money to never actually get paid…so be very careful. Retainage has a long history in the industry and can apply to both general and bookkeeping subcontractors. While highly divisive, retainage remains a construction industry standard, particularly for project using AIA billing and payment applications (this includes AIA Form G702 and AIA Form G703).
Tips to Help Subcontractors Deal with Retainage
In general, however, retainage is typically withheld in an amount of 5-10% of the total contract price. This amount can differ between the residential and commercial construction industries. In this example, the total contract price is $500,000 and the retainage percentage is 8%.
Closely read the terms of every contract.
- However, while retainage offers financial security and project quality benefits, it also presents challenges, including cash flow strain for contractors and the potential for disputes.
- However, it has played a significant role in boosting productivity and efficiency for the contractors’ and also serves as a suitable insurance policy for project’s owner.
- While retainage provides a layer of protection for the owner, it can have financial implications for contractors and subcontractors.
- These frequently asked questions address common issues that you’ll encounter when trying to stay ahead with the game.
Moreover, if profit margins are tight, which they often are, then retainage amounts can be greater than the negotiated bid percentage of profit. In accounting, firms or clients using a contractor for their work have to record the retainage as a liability. The remaining sum that would be paid to the contractor will be referred to as accounts receivables or retainage receivables. The amount that the customer is holding as retention would be recorded as retainage due. By following these steps and adhering to the contractual obligations, the retainage release process can be smooth and mutually beneficial for all parties involved.
What Is Retention in Construction?
By adhering to these legal considerations, project owners and contractors can establish a solid foundation for a transparent retainage process, minimizing the risk of legal disputes or complications. Implementing these strategies can help contractors and subcontractors manage retainage effectively, optimize cash flow, and ensure successful project completion. By adopting a proactive approach and maintaining clear communication and documentation, the impact of retainage can be mitigated, allowing for smoother operations and improved financial outcomes.
- This can help ensure you have additional funds you can dip into when needed—for instance, when clients try to withhold funds after project completion.
- Kelsie is a Senior Strategic Product Consultant for general contractors at Procore; working closely with civil and infrastructure clients.
- Even now, retainage serves as a financial incentive for general contractors to finish each construction project on time and for subcontractors to do their best work.
- Keeping track of retainage balances helps them forecast future income and manage expenses.
- It provides project owners with a financial buffer against potential risks, such as incomplete work, delays, or defects.
- It’s no secret that the construction industry is one of the toughest when it comes to managing cash flow.
Use our color coded map to learn about the retainage requirements that may affect your next job. Retainage has often been demonstrated to be the most reliable indicator of a job’s completion. Various circumstances determine retainage holding length, but most conditions are based on milestone accomplishment. This frequently includes the number retainage in construction of milestones and client satisfaction for each one. Let’s look at some of the game’s rules and how they may affect the project and bank balance now that we’ve looked at where this practice came from and why it exists.
Retainage, Lien Rights, & Payments Rights Conflict to Give Contractors Difficult Choices
PlanHub’s advanced suite of bid management tools allows you to increase productivity, identify relevant projects using data, build bids with Takeoff, and manage bids through the entire process. If something isn’t made clear, don’t wait to bring up retainage questions after the fact. Have these discussions early and often before virtual accountant you sign and finalize the paperwork. Next, we’ll take a more in-depth look at how retainage works and how to account for it on projects.