“Retainage” is law talk for money that an owner, or a contractor, withholds from an interim payment to pay at a later time. Construction contracts – and here I mean both prime contracts and subcontracts – usually provide for retainage. The owner often withholds retainage money from the prime contractor until the prime contractor
substantially completes all of the work. And the prime contractor usually withholds retainage money from subcontractors until they complete each of their respective parts of the work. Sometimes subcontractors withhold retainage money from sub-subcontractors, and so on down the line.
If you’d like to see what the retainage provisions in a contract look like, try
Section 5.1 of the American Institute of Architects A101 Owner – Contractor Agreement for a lump sum construction contract.
Why Have Retainage?
Why do owners and contractors withhold retainage?
- It’s security for performance. If full payment is deferred until completion, the contractor has a good incentive to complete it. They have “skin in the game” until the game ends.
- It’s also a reserve of money that an owner can draw on if the original prime contractor doesn’t perform and the owner has to replace the original contractor with a substitute contractor at a higher price. A substitute contractor usually costs more. And the owner may use money they withheld as retainage to pay the extra cost. Prime contractors do the same in case they have to replace a subcontractor.
How Much Retainage?
How much retainage an owner or contractor withholds varies from project to project and region to region. But customarily, it’s usually somewhere between five to ten percent of each interim payment. Owners, prime contractors, and subcontractors are free to privately negotiate how much retainage they’ll withhold from each payment. At least until they can’t anymore because statutes impose maximum retainage amounts. There’s a bill to enact that kind of statute pending right now in the Illinois General Assembly.
In my next post we’ll talk about releasing retainage early and stopping withholding even before work is complete.