The construction industry is unique in many ways. The construction parties are entitled to lien rights, for instance, which allow them to secure payment from felonious clients. Actually, not all industries defend their stakeholders from non-payment and it goes to show how frequent conflict payments arise in the construction sector.
On the other hand, retainage is another different feature of construction. And unlike the mechanics lien, retainage is a very controversial topic amongst construction participants. Retainage is nine letters long, yet for most construction professionals, it’s a four-letter debated word. In fact, not all contractors, subs and material suppliers are very keen about it, but retainage remains to be widely used across fifty states.
What is retainage exactly, and what are the things you must know about this matter like a contractor? This practical guide breaks down everything you must learn to know about retainage.
Overview of Retainage
Retainage refers to money line up for construction projects withheld until the client himself will deem the work complete and approves that the contractor has satisfied the contract. It is meant to protect the client’s investment in the event that the construction project may run into some major issues.
This particular practice of retainage has started in 1840s. The practice has effectively put a contractor’s profit at risk rather than the money of the investor. Thus, increasing the incentive to execute the projects well. As of today, retainage is still a widespread tool to minimize risk for developers, especially for complex and large-scale projects where risks are incredibly higher.
In construction, both terms retainage and retention are most likely used interchangeably. Yet, in most cases, the two terms have a slight difference. In construction, retainage often refers to the retained money, while retention usually refers to the act itself.
Even in many cases, both terms essentially refer toward the same thing, though.
Seven Things Every Contractor Must Know about Retainage
Overall, the practice and purpose of withholding retainage are frequently misunderstood by many. However, contractors have more power than they think. Below are the seven important things that contractors should know and understand about retainage and how to ensure they accumulate it all at the end of every project.
1. Retainage is up for negotiation
Retainage isn’t set in stone. In actuality, it is governed by the contract, which only means that it has become a significant part of the agreement between the two main parties involved. Each contract is negotiable, including the exact percentage being retained and for how long. It is usually up to the contracting parties to agree on certain terms, making sure that it works for both of them.
Contracts usually have a provision of negotiating variable retainage. Variable retainage can be used in many different ways and can mean that withheld amounts are being lessened over the contract’s length. It may also mean that a different rate can be applied to labor and materials. It helps contractors cover any up-front costs due to construction materials, wherein margins are typically lower.
2. It’s withheld from each payment
If you are a contractor, retainage may cause strain on your cash flow. Fortunately, it is not withheld in its total upfront. On a typical project, retainage percentage is often applied to every progress payment. Hence, on a one hundred thousand dollar contract with ten percent retainage, you don’t need to fork over ten grand at the very start. Instead, you will deduct the retainage from every payment application. And if the contract is being paid out over ten progress payments, one thousand dollars will possibly be held in retention.
3. Retainage depends on substantial completion
The vast majority of contracts often set the deadline of retainage payments the exact date of the project’s substantial completion. As a result, it raises problems for many reasons when managing construction projects and participating crew. The subs who work at the start of the project, starting from laying the foundation, might be forced to wait for months or even years before collecting the retained amounts.
Substantial completion can cause much broader problems since it is so difficult to nail down. Also, considerable completion doesn’t have any universal definition yet. That is why some contractors today usually define it in vague terms that often result in many interpretations. This makes it very hard for all suppliers and subs to outline their cash flow in advance because the project’s completion date turns into a moving deadline.
4. Retention bonds help you get paid faster
Several surety companies are offering retention bonds today. It is an insurance policy that usually takes the place of retainage as the guarantee of workmanship. The subcontractor in your team might negotiate the agreement where they can purchase a retention bond instead of owning funds withheld from the payments. If some issues arise later on where the hiring party uses retainage to cover the costs, the surety company will automatically step in to pay.
Depending on the contract’s size, a retention bond might be a lower-cost solution, especially in finding an agreement that aims to improve a contractor’s cash flow and satisfy the hiring party.
5. Laws set a deadline and limit for retainage
Through retainage is significantly dependent on the contract; there are federal and state laws that govern retainage. Almost all states have prompt payment laws and several statutes that set payment deadlines and retention limits. Apparently, contractors and owners aren’t allowed to withhold a greater percentage than the rate being set out by these laws.
Despite the timeline generally based upon on the payment of the contractor’s hiring party, the laws set a deadline for retainage payment as well. In some states, final and retainage payments are due within sixty days of the project’s completion. Passing payments within seven days into their participating crew is one of the project managers responsibilities that need to be prioritized.
6. Retainage doesn’t extend the mechanics lien
The mechanic’s lien is probably the most powerful tool that a contractor has to force payment. It is used on any outstanding payments for materials and works already being supplied, including retainage. However, it causes a dilemma because retainage is being held up until the end of the project and the subcontractor has already left the job. Good thing that Mechanics lien laws exist.
With the laws of mechanics lien, contractors have specific deadlines that should be strictly followed. If they just let the filing deadline delay without filing a lien claim, all lien rights can be lost forever.
7. Contractors have the right to get paid, and retainage included
A construction business has a legal right to collect payment both for materials and work they provide. Of course, retainage is no different at all. A contractor like you must understand all of the responsibilities, rights and options in negotiating about retention, including the way of collecting retainage right after the job is done.
Also, retainage is an essential component of contract management. It interferes through a purchase order set up or vendor agreement to indicate amounts to be retained. Records of the payment and transaction details are best tracked using a specialized software tool like Pro Crew Schedule. Not only this software application tracks all sorts of data and records, but it also improves overall project management for construction.
Construction Scheduling Software can help you deal with retainage.
When you’re part of the construction project management, it helps manage the relationship you have with your clients and subs. Besides keeping a good relationship with your client and subs, it is also vital to use an advanced software tool that will keep you on top of everything, especially agreements and contracts among all parties involved.
A project management software can do and manage a variety of things for your construction business. It keeps track of your subs’ details, including invoices, payments, contracts, retention, changes orders, and the amount of retainage for the job. Hence, this software tool will give you sufficient information that helps you in generating your subcontract agreements.
You can quickly determine how much retainage is withheld for every subcontractor or even a particular job once your subcontract agreement is generated. On top of that, you can easily track retainage accurately, including the possible changes and other details.
Today, Pro Crew Schedule continues to be the leading subcontractor scheduling software in the market. If you’re new to this specialized software, make sure to request a FREE live demo to experience all of its unique features!
Here are some of the most outstanding advantages Pro Crew Schedule offers to your construction business:
- Systematic scheduling in construction
- Time-tracking feature
- Better crew and resource management
- File sharing and document control
- Cloud-based storage
- Inventory management
- Easy to use and accessible anywhere and anytime
Today, this particular practice is widespread and is already part of the construction industry’s culture. Retainage is scorched into the laws across the world and it regulates all types of contractual provisions that any contractors can agree to. The majority of the laws are created to create and regulate certain limitations on the practice and promote fair use and prevent its abuse.