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Construction Law Today

Retainage Tips For Construction Contracts Part 1 – What’s Retainage, Why Have Retainage, How Much Retainage?

Posted in Retainage

What’s Retainage?

“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. 

  • Gil Anko

    If the contractor fails to request the release of the funds retained, is there a statute of limitations within which contractor must request release of the retainage???

  • ^ Gil,
    That’s an excellent question. It’s a great idea for a new post that I’m going to write.
    Please look for it coming up in the next week.
    — Josh

  • Ted

    Can the Owner withhold the retainage for 12, 18 or 24 months in leiu of a warranty bond, etc.

  • ^ Ted,
    good question. It will usually depend on the contract. Usually if you negotiate deferred retainage payment and the contractor agrees to it in the contract, then yes, you can usually defer the retainage payout. But there are at least two big “ifs” in there:
    1. Some state have statutes and judicial decisions that impose deadlines in paying retainage. In most cases in those states the contract terms are subordinate to statutes and judicial decisions. And the result there will usually be that retainage payout must be by the statutory or judicially imposed deadline.
    2. Even in a building down-cycle as bad as this one, most contractors I’m familiar with will be very reluctant to agree to postponing retainage payments for that long.
    — Josh

  • Evan

    If I am sub-contracting work for a government project do I HAVE to pass on the same amount of retainage (5%) that I have in my contract with the GC?