7 Things Contractors Need To Know About Retainage

7 Things Contractors Need To Know About Retainage

The complexity of construction projects, combined with the fragmented nature of the industry, can make it difficult for contractors to manage their cash flow. Payment delays are common in construction, with some contractors experiencing long wait times for payments from the client. Retainage is a common practice in the construction industry that helps to protect contractors.

Contractors should be aware of how retainage works to ensure that the contract is followed and that all payments are received on time. It’s important for contractors to understand their rights and responsibilities when entering into an agreement with a project owner. Knowing the limits on retainage, when payment should be expected, and how to protect yourself if payment does not arrive are all key components of being successful in the construction industry.

In this article, we’ll discuss the seven things that contractors should understand about retainage.

What Does Retainage Mean in Construction?

Retainage is the practice of holding back a portion of funds from payments due to contractors until certain conditions are met. This amount is held in trust by the project owner or general contractor and released upon completion of the work. Retainage clauses can be found in contracts to protect project owners’ interests from non-performance or breach of contract.

How Much Is Retainage Typically Required?

Retainage rates vary depending on the industry, contract type, and risk involved. Generally, 10-15% is standard in most contracts, but this number can be negotiated up or down depending on the project specifics.

It’s important to note that retainage rates are often higher than the standard retention rate in some industries, such as public projects (typically 10% retainage at the federal level).

How Is Retainage Calculated?

Retainage is usually calculated as a percentage of the total contract value. This amount is withheld from each progress payment until the project has been completed and accepted by the owner.

The amount of retainage should be clearly stated in the contract so that both parties understand how it will be handled throughout the duration of the project.

What Happens to Retainage Upon Completion of the Project?

Upon completion of the project, the contractor will submit a final invoice and supporting documents to the owner. The owner will then review the documentation and release any remaining retainage funds due to the contractor.

Depending on the contract terms, the retained funds may be sent to the contractor upon completion or shortly thereafter.

What Type of Records Should Contractors Keep for Retainage?

Contractors should keep detailed records of all progress payments, invoices, and supporting documents related to the retainage clause. This will help ensure that the contract is followed and that all requirements are met promptly.

It is also important for contractors to keep records of communication with the project owner regarding retainage payments and any disputes that may arise during the course of the project.

7 Things Contractors Need To Know About Retainage

Contractors must be aware of retainage and what it entails when entering a construction contract. Here are seven things you need to know:

1. Retainage Is Not Set in Stone and Can Be Discussed

It’s important to remember that retainage is a crucial part of any construction contract and needs to be discussed between the parties involved. It’s also beneficial for contractors to understand their rights when it comes to receiving payment for retainage, as well as how the law can help protect them should payment not be received on time.

2. Retainage Is Usually Based on Substantial Completion

Most contracts will state that retainage is due upon substantial completion of the project, so understanding how and when these milestones are to be achieved is important. It’s also beneficial for contractors to understand the specific payment terms in the contract surrounding retainage and when payments should be expected.

3. Retainage Laws Set a Limit and Deadline

It’s important for contractors to understand their rights under the law when it comes to retainage. This includes knowing the limits on how much can be held in retainage and when payment must be received. In some cases, these laws may vary between states, so it’s best to do your research ahead of time.

4. Retention Bonds Help Ensure You Receive Payment in a Timely Manner

Retention bonds offer contractors additional protection when it comes to receiving payment for retainage in a timely manner. These bonds are an agreement between the contractor and surety company that ensures the contractor will be paid within a certain timeframe, even if the party holding the retainage does not comply with their contractual obligations.

5. Contractors Have the Right To Request Payment for Retainage

Contractors have the right to request payment for retainage once a milestone has been achieved. This request should be made in writing and should include an outline of the timeline agreed upon in the contract and any other supporting information needed to demonstrate when payment is due.

6. Retainage May Be Withheld To Ensure the Completion of a Project

Retainage is typically held back by the owner or other party for the duration of a construction project and released once all the work has been completed satisfactorily. This helps protect everyone involved and ensures that a job is done properly from start to finish.

7. Retainage does not extend the mechanic’s lien deadline

It’s important to understand that retainage does not extend the time limit for filing a mechanic’s lien should payment not be received. Therefore, it is essential for contractors to keep track of deadlines and ensure that all invoices are paid or disputed in a timely manner in order to protect their rights.

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