General Contractors Guide to Handling Retention Money

Contractors who prefer not to have a portion of their payments withheld can obtain this bond. The retainage bond functions similarly to retainage by guaranteeing that the work meets the required standards. Instead of waiting for the retained funds to be released—which can be a lengthy process, especially for subcontractors—the contractor can secure a bond.

CFMA Says Owners Are Shifting Financial Risks Down The Contracting Chain

The amount of the contract price that can be withheld and the time for which the retainage may be Financial Forecasting For Startups withheld vary by state (and federally), and be dependent on project type. Retainage is a portion of the payment withheld from contractors or subcontractors to ensure that the job is completed satisfactorily. It serves as a financial incentive for contractors to finish the work properly and address any deficiencies.

Guide to the first 30 days

Certain states set upper limits on retainage, such as “no more than 5%” or “no more than 10%”, while others leave it up to the parties involved to negotiate the percentage. The use of retainage also depends on the type of project and its complexity. For example, smaller residential unearned revenue projects may not include retainage, while larger commercial or public projects usually do. Payment management apps, for instance, make it easy to track job tasks and milestones.

• Retainage can cause strain on a contractor’s cash flow, but fortunately it’s not withheld in its entirety up front.
• If the party responsible (owner, general contractor, or subcontractor) does not release retainage in accordance with legal requirements, they will incur interest at the rate of 1% per month.
• Retainage laws vary from state to state and can sometimes conflict with federal legislation.
• Mechanics liens are the most powerful tools available to construction companies to secure all of their payments, including withheld retainage.
• Perhaps you can offer a letter of credit or a surety bond to substitute for the retainage requirement.
• A surety bond is different from traditional insurance in that the principal is obligated to pay back the surety company on any claims paid out.

Retainage, Lien Rights, & Payments Rights Conflict to Give Contractors Difficult Choices

Some surety companies offer retention bonds, which is essentially an insurance policy that takes the place of retainage as a guarantee of workmanship. A subcontractor may be able to negotiate an agreement in which they purchase a retention bond instead of having funds withheld from their payments. If an issue later arises for which the hiring party would have used retainage to cover the cost, the surety company steps in to pay.

Money: What’s the Difference?

• This means that contractors and subcontractors must fully understand how it works for every project and create a financial plan that accommodates such conditions.
• Under New Mexico’s rules, by contrast, withholding retainage is prohibited.
• Finally, a contractor or subcontractor eligible to file a mechanic’s lien when their retention remains unpaid, as retainage represents a portion of money due for improvements to real property.
• Quite often, you will see the terms of construction retainage and construction retention used interchangeably.
• Funds can only be retained if the conditions of retainage are clearly outlined and agreed upon in the construction contract.
• Treat retention payments like any other payment you’re trying to collect.

This delay in payment puts a stain on cash flow, especially considering retainage amounts regularly mirror (or even exceed!) the profit margin for a job. By issuing a retainage bond, contractors and subs may be able to get their hands on retainage payments early to keep the cash flowing. An alternative to retainage is a retainage bond, also referred to as a release of retainage bond.

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Underbilling occurs when a contractor does not bill for all retention vs retainage the labor and materials delivered in a billing cycle. Next, let’s look at how retention is recorded from an accounting perspective. What is a cost-plus contract and how is it used in the construction industry? Typically, the filing of a notice of commencement by the property owner or other top-of-chain party affects preliminary notice and… 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.