In addition to being a key project milestone, Substantial Completion often holds other contract ramifications. A substantial portion of any retainage may be released after Substantial Completion has occurred. Likewise, liquidated damages for late delivery often use Substantial Completion as the benchmark for when delivery has occurred. Retainage can be released early, but again, it depends on your contract.
Retainage Amounts & Timetables Are Mostly Set By The Parties Agreement
This is an important distinction that contractors should keep in mind to avoid cash flow issues during the project. The retainage for your project will be dependent on the total cost, but the withheld sum is typically predetermined within the contract, often falling within the 5% to 10% range. One way to calculate retainage for a fixed rate agreement is by applying the retainage percent to the entire contract price and then dividing it by the number of payments https://www.bookstime.com/ that will be completed. Even after the project is finished, inspected, and approved, it can be 30, 60, or 90 days (depending on state laws) before the GC receives its retainage and, in turn, pays you. What’s worse is that subs may never receive their retention payments if the owner or GC goes bankrupt or out of business. For example, let’s assume that ‘ACME Plumbing’ is a subcontractor on a project where retainage of 10% will be withheld from their payments.
Retainage creates crippling cash flow issues.
Second, it’s abused by holding money too long or withholding high percentages. It’s common for contractors to have high amounts withheld from them (even when it’s limited!), and to have that money withheld for a very long retainage in construction time. Sometimes, contractors must have to make formal demands for retainage. Retainage is commonly withheld until the end of a construction project overall, rather than the completion of a particular contractor’s work.
Use a reliable accounting software.
When you’re entering into a contract for a project where there will be money withheld, make sure you examine the terms to find out everything you possibly can about how the retainage will work. The challenge with the private project laws is that those who need the money the most won’t have the cash to fight for the penalties. 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.
- As if managing cash flow for your construction company isn’t difficult enough, if you’re working on a commercial project, you may also have to deal with retainage.
- Project-based material financing offers faster access to cash and higher credit limits than traditional lines of credit, while enabling you to get better supplier pricing on the materials you need to start new projects.
- Alternatively, on written request of the contractor, the owner shall make payments of the retention earnings directly to the escrow agent.
- Retainage terms typically allow payers to hold retainage until the end of the project or until a certain percentage of work is finished.
- In these discussions, iron out payment timelines and unique details like earning interest.
We are a subcontractor and the GC we are working for is asking us to sign and notarize progress payment line waivers for amounts they have not paid us for, is this legal? They are 60 days behind on our payment yet they are refusing to give us… When the project is complete, Paul’s invoices ABC for $5,000 in retention. This is recorded as a debit to the retention payable account and a credit to accounts payable.
- The practice effectively put the contractor’s profit at risk rather than the investor’s money, increasing the incentive to execute the project well and disincentivizing underbidding.
- In construction, retainage is the practice of holding back a portion of payments on a job as a kind of financial incentive that ensures each milestone is successfully completed.
- Furthermore, maintaining and tracking withheld funds is a major headache for everyone involved.
- Most states require you to file a lien within 30 to 120 days of completing work on a project.
- In addition, the law often caps the amount that can be withheld on projects in that state.
- I have heard the industry standard is 10% of the overall project is given to project closeout.
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- The primary purpose of ESSA is to provide advocacy on behalf of subcontractors in the New York State Legislature and before the State’s various contracting agencies.
- If you’re relying on retainage funds to hit your account in order to procure materials or hit payroll, you need to take a step back and rethink how you are budgeting for retainage contracts.
- The specific amount is specified in the construction contract and is usually anywhere from 5 to 10 percent of each progress payment, depending on the type of project.
- Project owners did this to ensure that full payment was only released upon completion of quality work.
- As a result, subcontractors’ contracts often incorporate early release provisions.
