The contract specifies 10% retainage for the first 50% of work, then 5% for the remainder. Break silos and improve cash flow with trial balance tools that keep everyone on the same page. The steps required in a project’s journey to completion are importation to how successful the project will be. Underbilling occurs when a contractor does not bill for all the labor and materials delivered in a billing cycle.
Construction Project Management Best Practices: From Start to Closeout
Now that we’ve explored where this practice comes from and why it exists, let’s dig into some of the rules of the game, and how it may impact your project and your pocketbook. What is a cost-plus contract and how is it used in the construction industry? The Work In Progress (WIP) schedule is an accounting schedule that’s a component of a company’s balance sheet. I will provide you with an overview of the retainage specifics by location, as retainage regulations differ by country or state. Retainage laws vary from state to state and can sometimes conflict with federal legislation. It’s not likely that you’ll get a GC to completely remove the retainage clause.
Does retainage change according to the project type?
Please do not email confidential information, as any unsolicited information received will not be regarded by us as confidential. Many contractors spend hours reconciling retainage each month—often with missed entries or outdated spreadsheets. You should clearly show retainage as a different line item on every invoice you send. This way, your client will know exactly how much is being held back and why. This blog is for informational purposes only and aims to provide a general overview of topics related to law and other areas of general interest. While reasonable efforts are made to ensure the information presented is accurate and up-to-date, we cannot guarantee that it is free of errors, complete, or current at all times.
How to Stay Compliant with Construction Tax Laws
During my talk at CFMA Annual 2025, one attendee mentioned they’ve been waiting on a retainage payment since 2022. Retention, also called retainage, is money held back from each payment to ensure that a contractor or subcontractor completes a project. It provides a financial incentive to ensure that the work is of appropriate quality and meets the plans and specifications. It is intended to cover additional expenses if the contractor or subcontractor doesn’t finish the work or there is a quality issue.
This also occurs due to the pass-through effect as the contractor passes it on to the workers of the project. The most significant advantage of the retainage is the provision of a built-in remedy for failure of project completion by the contractor. Paying from the retainage to subcontractors and suppliers helps the owner complete the work.
Furthermore, maintaining and tracking withheld funds is a major headache for everyone involved. Retention tactics in construction have been widely condemned around the world. If a mechanics lien claim is being filed, most states empower the party making the claim to file for the full amount of what they’re owed against the project. The lien claim, in other words, is equal to the total value of the work, labor, and materials that the filing party furnished to the job (less any payments received). The fact that some of this money may be held as retainage is usually irrelevant — basically, if you earned the money fair and square, and if your lien rights are intact, then you’re allowed to file a mechanics lien. Generally speaking, the parties can agree to anything they want, so long as they don’t run into a Interior Design Bookkeeping legal limitation (we’ll discuss those below).
This also means that ACME is going to have to have enough cash on hand (or the ability to secure financing) to fund that loss for as long as it takes for them to finally receive the retainage withheld. The longer that takes, the more money ACME will need to keep their business going. When setting a retainage percentage, there are a few factors that are essential to consider, specifically, in construction.
- Meaning, if there’s an issue with the work of the party who’s paying the bond premium, their customer can make a claim against the bond to pay for it.
- Criteria for the release of retainage are established in the contract and are typically linked to project milestones and completion stages.
- You should check out the payment reputation and practices of your contractor to see whether anyone reports them engaging in this abusive practice.
- Retention receivable is recorded by general contractors and subcontractors and is the number of funds due from a contractor’s customer for retention.
- Reduce invoice aging by 30% with billing, collections, and reporting tools.
- The longer that takes, the more money ACME will need to keep their business going.
- When examining and agreeing to a budget for your next construction project, whether public or private, there are certain factors to consider as a contractor.
Disreputable clients and contractors engage in predatory or malicious actions. Contractors and subcontractors have little control over their financial flow. Retainage ensures that all work retainage vs retention is completed according to the client’s specifications.
Understand that Mechanics Lien Deadlines Won’t Be Extended Just Because Retainage Is Still Withheld
Some states even have a statutory limit on retention for projects within the state boundaries. The procedure described here for handling retainage in Total Office Manager will not only help you track who owes you for retention, but also track how much they owe. In addition, it helps to track the retention on your books as an asset until the customer pays the balance. While these terms are used interchangeably, there is a difference between retention and retainage.
Subcontractor Retainage Bonds
But, just like when ordinary retainage is in play, contractors and subs will generally have the opportunity to correct any issues before claims are made against retention. Retention bonds make the most sense for contractors and subs when the bond premium costs less than retainage would have (i.e. when the bond premium is less than 5-10% of the contract price). Before we get into retention bonds, let’s do a lightning-fast recap of retainage.