This also means that ACME is going to have to have enough cash on hand (or the ability to secure financing) to fund that loss for as long as it takes for them to finally receive the retainage withheld. The longer that takes, the more money ACME will need to keep their business going. Unfortunately, it’s clear that cash flow is an issue in the construction industry, and that’s even before retainage enters into the picture. Construction businesses fail faster and more often than any other industry, Food Truck Accounting as highlighted in the industry’s failure rates. Yet, even with all of these potential problems, retention clauses in construction contracts are rarely questioned or even thought about very much, at all.

Financial Protection for Project Owners

It stands as a customary procedure in both public and private endeavors, serving as a monetary motivator to produce high-quality work and meet the requirements of the project owner. With LetsBuild construction management software, you can see your project in real-time and work with a single source of truth. We’ve helped contractors gain control of thousands of construction projects by keeping detailed audit trails of what’s been said and what’s been done. You can quickly check statuses and identify problems to solve misalignment issues and complaints as soon as they arise, leaving your clients with no reason to withhold your retainage payments.

• As a result, they are frequently required to wait for milestones or entire completion before being paid.
• By withholding a portion of payments until project completion, retainage provides project owners with a safeguard against potential issues such as incomplete work, defects, or contractor defaults.
• Finally, a realistic budget analysis, well-defined contractual conditions, and effective process execution can avoid any adverse effects (whether intended or not) related to retainage.
• How you reconcile payment and revenue will depend on the terms of your contract.
• This percentage represents the portion of each payment due to contractors and subcontractors that will be withheld until the project reaches its completion.
• They must declare that retainage will be released at particular milestones and the consequences of not doing so.
• On a more positive note, holding back a portion of payment until the work is fully complete and meets the required standard helps to encourage timeliness and high quality of work.

Front Loading a Schedule of Values Risks of Gambling with Cash Flow

• Procore is committed to advancing the construction industry by improving the lives of people working in construction, driving technology innovation, and building a global community of groundbreakers.
• In cases where retainage exceeds the profit margin, progress payments aren’t even enough to cover labor and material costs.
• You can quickly check statuses and identify problems to solve misalignment issues and complaints as soon as they arise, leaving your clients with no reason to withhold your retainage payments.
• The retainage amount for the current contractor project is determined based upon the overall cost of the project or contract price.
• As a contractor, you can take legal action against an owner if you are not paid for the services you provided.
• Sometimes, contractors must have to make formal demands for retainage.

In some rare circumstances, withholding money from contractors can actually be required by state law. For example, according to retainage rules in Texas, the property owner must retain 10% on private construction payroll projects. Under New Mexico’s rules, by contrast, withholding retainage is prohibited.

Understand state laws

If something isn’t made clear, don’t wait to bring up retainage questions after the fact. Have these discussions early and often before you sign and finalize the paperwork. The American Institute of Architects (AIA) offers standardized pay app templates that provide convenient guidelines for getting these numbers right.

Effortless Retention Tracking and Calculation with Planyard

Some states even limit the amount of retainage in construction money that can be retained, and some might require it to be held in escrow. Collectively, these issues reduce efficiency and lead to delays in securing or releasing retained funds. At the same time, project inefficiencies become key points of frustration for your partners. To limit these difficulties, here are four steps to efficiently manage retainage in your construction projects.