Retainage in construction

Construction is paid in arrears, by milestone. Without retainage, a contractor could bill 100% of work completed on every progress payment and have no skin in the game for the final 5–10% of the punch list — the slowest, most administratively painful portion of any project.

Retainage solves that by holding back a percentage of each progress payment until substantial completion. The held money serves three purposes: (1) it gives the contractor incentive to finish the punch list, (2) it gives the owner leverage to require correction of defects, and (3) it provides a financial cushion in case of contractor default.

Residential construction: Retainage on residential builds typically runs 5–10% per draw, though many residential contracts negotiate retainage down or eliminate it entirely on smaller builds. Some lenders require retainage on construction loans regardless of what the builder negotiates with the homeowner.

Commercial construction: 10% retainage is most common on commercial projects under $1M. Larger projects often use sliding-scale retainage — 10% on the first 50% of work, 5% on the second half, reflecting reduced default risk as the project progresses.

Public/government projects: Retainage rules are set by statute and vary state by state. Many states cap public-works retainage at 5%, and several require retainage to be held in interest-bearing accounts that accrue to the contractor.

State retainage limits: About half of U.S. states have statutes limiting how much retainage can be withheld on private construction projects. Maximums commonly range from 5% to 10%. Builders working across state lines should verify the limit on every project.

Standard practice: retainage is released at substantial completion of the project. The sequence:

• Contractor declares substantial completion (typically when the work is sufficiently complete for owner use).
• Architect or owner's representative issues a certificate of substantial completion.
• Punch list is generated.
• Retainage is partially released — typically enough to leave 200% of the punch list value held back.
• Final retainage is released after final completion and final lien waivers are collected.

Many contracts also allow retainage to be reduced or eliminated on stored materials, on early-completion trades, or at the 50% completion milestone. The specific terms are in the contract — Kiron's Ella reads the contract and flags any G702 where retainage is not handled per the agreement.

1. Wrong percentage applied. The most common error — a G702 applies 10% retainage when the contract calls for 5%, or applies retainage to stored materials when the contract exempts them.

2. Retainage not reduced at milestone. Many contracts call for retainage to reduce after 50% completion. Manual G702s frequently fail to apply the reduction, trapping subs' cash longer than the contract requires.

3. Retainage on change orders. Change orders should usually be subject to the same retainage percentage as the base contract. Sometimes G702s apply zero retainage to change orders, which inflates the current payment due.

4. Final retainage release missed. After final completion, retainage release requires final lien waivers and a clean punch list — but the documentation often lags, leaving cash held for months after the work is done.

Ella reads the contract once and knows the retainage rules. On every G702 / G703 that arrives, she validates that retainage is applied correctly to every line — base contract, change orders, stored materials — and flags any deviation. At substantial completion, she tracks the punch list value against retainage held and flags when retainage is eligible for partial release. At final completion, she tracks lien waivers and flags when final retainage is releaseable.