Retainage in Construction Contracts Explained
What Is Retainage?
Retainage (also called retention) is a percentage of each progress payment that the project owner or general contractor withholds from the contractor or subcontractor until the project is substantially or fully complete. It serves as a financial incentive for the performing party to finish the work and correct any deficiencies.
Retainage has been standard practice in construction for over a century, though the practice has been increasingly regulated by state legislatures.
How Retainage Works
- The contract specifies a retainage percentage (typically 5-10%)
- With each progress payment, the owner or general contractor withholds the retainage amount
- The withheld funds accumulate over the life of the project
- Upon substantial completion (or final completion, depending on the contract), the retained funds are released
- Punch list items or warranty issues may delay partial release
State Laws Governing Retainage
Many states have enacted legislation limiting retainage practices:
- Retainage caps — Several states cap retainage at 5% (e.g., Texas, Florida, Georgia)
- Release requirements — Some states require release of retainage within a set period after substantial completion
- Public vs. private projects — Rules often differ between government and private construction projects
- Reduction after 50% completion — Some states require the retainage percentage to decrease as the project progresses
Impact on Subcontractors
Retainage can create significant cash flow challenges:
- On a $500,000 subcontract with 10% retainage, $50,000 is withheld throughout the project
- Subcontractors typically cannot collect retainage until the entire project is complete, even if their scope is finished early
- Flow-down provisions mean the general contractor may hold subcontractor retainage until receiving their own retainage from the owner
When to Consult a Lawyer
Consider having a construction attorney review retainage terms, especially regarding release timing, applicable state caps, and your rights if retainage is not released promptly after completion.
This article is for informational purposes only and does not constitute legal advice. Consult a licensed attorney for guidance specific to your situation.