Retainage
A percentage of payment withheld until project completion or warranty period ends.
Definition
Retainage (or retention) is a portion of the contract payment withheld by the client until the project is fully complete and any defects are corrected. Typically 5-10% of each progress payment is retained. The retained amount is released after final inspection, punch list completion, or at the end of a warranty period.
Common in construction and large projects, retainage protects clients against incomplete work, defects, or contractor abandonment. It provides leverage to ensure final details are completed.
Why It Matters
Retainage affects cash flow—you won't receive the full contract value until well after work is substantially complete. Plan for this delayed payment when projecting cash flow.
For clients, retainage reduces risk of paying for defective or incomplete work. For contractors, it's important to track retainage balances, submit final completion documentation promptly, and chase retained amounts once eligible for release.
Examples
- 1
A construction contract specifies 10% retainage. On a $100,000 project billed in monthly installments, $10,000 is held until final completion.
- 2
Retainage is reduced to 5% at substantial completion, with the remaining 5% released after the punch list is completed.
- 3
A contractor negotiates: retainage held in an interest-bearing escrow account, with interest paid to the contractor upon release.
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