What Is Retainage in Construction and Why Is It Important?
Cash flow is a major concern for construction companies. Whether you’re a contractor working on a small project or a business owner managing larger public projects, cash flow can be an issue.
Retainage is one of the reasons contractors can face cash flow problems.
You don’t have to face financial difficulties. Understanding your rights and options arms you with the information you need to keep your business in the black.
Keep reading to find out the basics of retainage and how Flexbase can help you.
Table of Contents
- Flexbase: Manage Your Retainage With Our Cash Flow Management Solution
- What Is Retainage in Construction?
- How Does Construction Retainage Work?
- Who Needs Retainage in Construction?
- Retainage in Construction Affects All Parties
- Legal Limitations Concerning Retainage in Construction
- Advantages and Disadvantages of Retainage
- Flexbase: Cash Flow Solutions at Your Fingertips for All Parts of Your Construction Contracts
Flexbase: Manage Your Retainage With Our Cash Flow Management Solution
Flexbase is a one-stop solution for cash flow management. Why spend time worrying about upfront costs or waiting for payment?
You have better things to do with your time, like start your next project.
Flexbase can make your life easier in many different ways:
- Automated paperwork and compliance
- Intelligent reminders and legal notices
- Help you get paid faster with discounts
- Flexbase cards to get quick money and track spending
- Improved customer communication
- Gain working capital with Flexbase Capital
- Account integration that puts everything in one place
Flexbase is ONE software program that can meet all of your construction accounting needs. No more juggling different programs or having to keep records by hand.
This one business upgrade can save you time and get you money sooner than traditional methods.
Part of successfully budgeting a construction project is knowing how much money will be withheld from each payment for retainage.
Don’t get put into a bind by running out of cash before the project is finished. Flexbase can help you keep the cash flowing.
What Is Retainage in Construction?
One of the most commonly asked questions in construction accounting is, “What is retainage in construction?”
Contract terms set an amount that is withheld from each payment to protect owners. This is called retainage.
Retainage has been a part of construction for over a century. It is the amount of payment withheld until a project is complete or substantial progress has been made.
The practice is meant to protect owners from paying for a project that does not get completed to the agreed-upon specs.
Retainage is also written into the agreement between a contractor and a subcontractor.
Unfortunately, it can be used against contractors by unethical persons who take advantage of the practice. Knowing your rights and responsibilities can save you from losing big bucks on a project.
What Is the Difference Between Retention and Retainage?
The terms are usually interchangeable but they can be used to describe different withholdings.
Retainage is an amount stated in the project contract to be withheld from payments in a construction project.
Retention is another way of saying money will be withheld to to act as a security against poor or incomplete work. It is similar to a deposit, but instead of paying extra upfront, they are holding money back.
This can really mess up your cash flow.
They may sound like the same thing, and essentially they are, but some owners have been known to use the terms to reduce the amount of upfront payment to save themselves money.
Don’t get caught in that trap.
The best way to protect yourself is to make sure that an owner isn’t using different terms to withhold money for the same purpose.
Retention can also be used to refer to the act of retaining money, so know how the term is being applied in your situation.
How Does Construction Retainage Work?
Every state has its own laws and regulations regarding construction payment contracts.
For each project, the payment schedule and amounts are dictated by the contract.
Construction retainage impacts cash flow and can throw a wrench in your project budget if you aren’t prepared.
It also protects you from incomplete or unsatisfactory work by a subcontractor. There are different rules based on certain factors.
Retainage varies by:
- Type of project
- Contract terms
- Government regulations
Researching, understanding, tracking, and collecting on retainage can be a real pain for contractors. And it can certainly mess up your cash flow.
Commonly asked questions include:
- How is retainage calculated?
- Most contracts will dictate that 5-10% is withheld from the payments, but this can be negotiated and vary by state.
- How is retainage withheld?
- Usually a portion of each payment is withheld. This is one area to make sure you plan it out so cash isn’t all being taken from the first payment.
- For how long is retainage withheld?
- Retainage is generally held until the project is complete or substantially complete, but that needs to be agreed upon by both parties and written into the contract.
How Do You Account for Construction Retainage?
It’s important to make sure unbilled retainage is monitored so it can be billed promptly when the project is complete. Careful records should be kept to make sure all monies owed are paid on time and according to the construction contract.
Keeping in touch with the client is essential in receiving the retainage when the work is complete. You need to be on the same page and know when payments will be sent.
Communication with customers is professional and easy with Flexbase. You can impress clients with a beautifully generated web invoice and automatically submit paperwork mapping to your customers.
You can even communicate with customers right from Flexbase with comments on change orders.
Flexbase lets you focus on your project, not get stuck behind a desk handling the books.
Who Needs Retainage in Construction?
Protecting the customer is the main purpose of retainage. Construction contract negotiations will determine just how much protection, financially speaking, the owner has in case the project is not completed.
Retainage also helps subcontractors. Should a project not be completed, the money withheld can go toward paying subs so they don’t lose out.
Retainage in Construction Affects All Parties
Retainage doesn’t just affect the contractor. Other parties are impacted, for better or worse, by the retention.
Retainage also determines the amount a contractor can withhold from a subcontractor until the project is complete.
Pretty much everyone involved in a construction project is affected by retainage:
- Materials Suppliers
- Lenders; and
- In some cases, employees
Anyone needing payment may have to wait for the final payment to collect the retained fees.
The cash flow problems can trickle down and should be considered before, during, and after accepting a project.
Planning ahead or having other options, like the Flexbase card, can save you from going broke or having to wait weeks — or even months — before you see any profit.
Flexbase has options to help make sure retainage doesn’t put your business on hold.
Legal Limitations Concerning Retainage in Construction
Contractors aren’t just at the mercy of owners when it comes to retainage amounts. Laws determine the maximum amount that can be negotiated.
If retainage is not written into the construction contract, then it is not part of the agreement and cannot be legally withheld.
There are certain legal limitations on retainage, depending on the type of project:
- Federal projects
- State, county, or municipal projects
- Private or commercial projects
Check the laws in your state to know the limits to retainage that apply to your project.
The Federal Acquisition Regulation determines the rules of retainage for contractors.
Federal laws dictate that retainage amounts cannot exceed 10% of the project cost. Retainage cannot be held without just cause and is determined for each project. There is not a blanket amount.
If a retainage fee is not held by the government agency, the contractor can still include retainage in the contract with a subcontractor.
However, if the contractor is withholding retainage, and the agency is not, the contractor cannot bill the agency for the amount being retained.
Ultimately, it creates a type of retention itself.
State, County, or Municipal Projects
Each state has a different set of laws regarding retainage for agency projects. All 50 states allow for retainage on public works projects, but amounts can vary from state-to-state.
Retainage is even required by some states, so familiarizing yourself with state laws before bidding on an agency job can keep you from being surprised later on.
Private or Commercial Projects
For private or commercial projects, the construction contract dictates the amount of retainage.
As long as state and federal limits are not exceeded, the contract terms can be decided upon by the contracting parties.
Advantages and Disadvantages of Retainage
There are pros and cons to retainage. While it can help ensure a project is completed and keep you from paying for work that never gets done, or is done poorly, it can also put a crimp in your wallet.
Some advantages of retainage include:
- Owners and contractors have assurance a project will be finished in a satisfactory manner. The money withheld can be used to finish a project if the contractor or sub defaults.
- Interest can be earned on retainage, if the contract allows, making it financially beneficial for the one withholding the money.
- If a contractor defaults on a project, subcontractors can still get paid by the owner from the retainage.
- Retainage offers security to lenders and lowers the risk of a project not being completed and the lender losing money.
There is also a downside to retainage. It can wreak havoc on a construction budget if money is tight.
Some disadvantages of retainage include:
- Money is tied up in retainage, so contractors may not turn a profit until the project is complete.
- Cash flow is reduced during the project.
- If retainage is released with the final payment, it can take weeks for contractors to finally collect so they can pay invoices.
Using products like Flexbase Capital can minimize cash flow problems so you can keep building your business.
Flexbase: Cash Flow Solutions at Your Fingertips for All Parts of Your Construction Contracts
Retainage doesn’t have to hold you back. Flexbase offers cash flow solutions that can keep you rolling.
Whether you need the Flexbase card to track spending and control costs or you could use more money with Flexbase Capital, this is your one-stop shop for all of your construction accounting needs.
You work hard enough. Let Flexbase make managing your money easier.