Retainage in Construction: How It Works and When to Release It

Retainage is simple in theory and messy in practice. It is a significant amount of money, it sits unpaid for months, and disputes over its release are among the most common payment fights on construction projects.

How it works

Each time the contractor is paid for completed work, the owner withholds a set percentage. On a $200,000 pay application with 10 percent retainage, the contractor receives $180,000 and $20,000 is held. The held amount accumulates over the project and is released later according to the contract.

Typical numbers

• Percentage: 5 to 10 percent is common. Public projects and some states cap it; many private contracts use 10 percent.
• Reduction: contracts often reduce retainage (for example to 5 percent) once the work is about 50 percent complete and progress is satisfactory.
• Release: commonly at substantial completion (partly) and final completion after punch-list items are done.

How it appears on a pay application

On an AIA G702/G703 pay application, retainage is calculated per line item or as a total and is subtracted from the amount due. Check three things every month: the percentage matches the contract, it is applied to stored materials the same way the contract says, and the running total equals the sum of the prior periods.

Common mistakes

• Wrong percentage or wrong base. Retainage taken on the full contract rather than on completed work, or not applied to change orders.
• Not reducing when the contract says so. The contractor is entitled to a reduction at the agreed milestone; holding on is a breach.
• No release trigger defined. "Upon completion" with no definition of completion invites disputes. Tie release to a document: certificate of substantial completion, final inspection, accepted punch list.
• Passing retainage down badly. A general contractor who holds retainage from subs without being paid retainage by the owner, or the other way around, creates cash-flow problems and claims.
• Forgetting deadlines. Many states set a deadline for releasing retainage after completion and penalties (such as interest) for late release.

Owner checklist

1. Percentage, reduction point and release trigger are written into the contract.
2. Retainage is tracked on every pay application and reconciled monthly.
3. Release is conditioned on a punch list, lien waivers from the whole chain and closeout documents.
4. For disputed items, hold an amount tied to the cost to fix, not the whole balance.

Subcontractor checklist

1. Confirm your contract passes through the same retainage terms as the prime contract and know when you get yours.
2. Keep records of what is held and request release as soon as the trigger occurs.
3. Know your state deadlines and notice requirements for retainage claims.

Lenders usually track retainage as part of draw reviews. MEXUM checks pay applications for percentage, base and running-total errors and compares them with the contract terms.

General information, not legal advice. Retainage rules vary by state and by contract.

Frequently asked questions

What is retainage in construction?

Retainage, also called retention, is a percentage of each progress payment held back by the owner until the work is substantially or fully complete, as security that the contractor finishes and corrects defects.

How much retainage is typical?

Five to ten percent is common. Some states and public contracts cap it, and many contracts reduce it after the project is about half complete.

When is retainage released?

According to the contract: often partly at substantial completion and the balance at final completion after the punch list is done and closeout documents and lien waivers are delivered. Many states also set statutory deadlines.

Can an owner withhold retainage for disputed work?

Usually only an amount related to the cost to correct or complete the disputed work, and only as the contract allows. Withholding the entire balance for a minor item can expose the owner to claims and interest.