Construction businesses fail faster and more often than any other industry, as highlighted in the industry’s failure rates. Under the Federal Acquisition Regulation (FAR), a prime contractor may withhold payments from their sub pursuant to the contract between the parties. So, if the contract between them provides for retainage, they are allowed to do so under bookkeeping the terms set forth, even if the government is not withholding retainage from the prime. Some subs submit the final pay app and just wait to get their retainage.
The MEP Lifecycle: How Contractors Can Benefit from Thinking Ahead
Understanding retainage vs retention, how to calculate retainage, and best practices for managing withheld funds can retention vs retainage help construction professionals navigate this process effectively. In some rare circumstances, withholding money from contractors can actually be required by state law. For example, according to retainage rules in Texas, the property owner must retain 10% on private construction projects. Under New Mexico’s rules, by contrast, withholding retainage is prohibited. When construction businesses are financially stable, they’re much less likely to default.
Retainage Is a Huge Financial Challenge, Especially for Subcontractors
Retainage is usually a fixed percentage of the contract value, often ranging from 5% to 10%. The specific percentage and terms are outlined in the construction contract. Contractor project management software might not seem different from project management software… On the other hand, ‘retention’ refers to any case where the Accounts Receivable Outsourcing project owner withholds money for purposes beyond quality assurance.
A General Contractor’s Guide to Retainage in Construction
For project owners, it’s a way to ensure everything is completed correctly before paying in full. But misunderstandings about retainage can lead to payment delays, disputes, and even financial strain. As a result of this setup, progress payments and/or final payment is made in full.
- In Iowa, a contractor may request the early release of retainage on a public project.
- Construction businesses fail faster and more often than any other industry, as highlighted in the industry’s failure rates.
- It is governed by the contract, which means it’s part of the agreement between two parties.
- Once the amount has been established by the contracting parties, the project retainage percentage will be applied.
- For instance, a GC might only have 5% withheld from them, but then turn around and withhold 8% or 10% from their subcontractors.
- In the construction contract, Uptown negotiates a deal under which it pays Smith $200,000 per month for ten months, with a 10% retainage.
- Though a typical retainage percentage is 5-10%, this can vary depending on the project and jurisdiction.
Don’t Be Afraid to Leverage Your Lien Rights in Order to Get Paid
Retentions are usually due 30 days following the completion of a project and acceptance by the customer. A retainage is more likely to be imposed by a client on a new contractor, since there is more uncertainty about the contractor’s performance. Retainage is less likely to be imposed when the client needs to have a project completed within an unusually short period of time. Waiving the retainage clause in a contract is considered a major incentive to entice a contractor to work for a client. As a general contractor, you manage diverse responsibilities that draw from an extensive skillset. From the interpersonal, management-savvy required to build strong supplier and subcontractor relationships, to meticulous record-keeping that keeps the accounts and contracts on track.
A Schedule of Values is an essential tool used in construction project accounting that represents a start-to-finish list of work… A retention bond might be secured at the beginning of the project in order to stave off retainage from the outset. However, a retention bond might also be introduced later on in a project in order to get ahold of retainage that’s been building up. Because in construction, the difference between profit and struggle often comes down to who controls the retainage game, and now, that’s you. A contract that’s perfectly legal in Florida might be illegal in Illinois. Competent contractors check the rules before signing – because “standard” retainage clauses often aren’t.