The Ultimate Guide to Retainage in the Construction Industry

Retainage, also called “retention,” is an amount of money “held back” from a contractor or subcontractor during the term of a construction project. This is a very unique practice specific to the construction industry, but within the industry, it’s extremely popular. Most construction contracts mandate that a certain percentage of the contract price (frequently 5% or 10%) is withheld from the contractor until the entire project is substantially completed. This creates cash flow challenges in an already cash-poor industry, the practice is too frequently abused, and of course, it’s subject to complicated regulations that make it tricky to execute.

The History of Retainage & Why It Exists

Retainage was first invented in Britain back in the 1840s to ensure that construction projects were completed fully, and to manage the risk of poor workmanship, which was very common at that time (and, many would argue, still common). The argument in favor of the retention practice contends that withholding money from a contractor accomplishes

Since its first use almost two hundred years ago, the practice of withholding money from contractors during the course of a construction job continues, and it continues in largely the same form that existed back in the 1840s. Today, the practice is common and is part of the industry’s culture. The practice is also baked right into laws all across the world that regulate the types of contractual provisions that contractors can agree to. Most of these laws were created to regulate and create limitations on the practice

Conclusion

In conclusion, retainage plays a significant role in the construction industry by providing a form of security for project owners while also ensuring that contractors and subcontractors fulfill their obligations. By understanding the purpose, regulations, and best practices surrounding retainage, stakeholders can effectively manage payment processes and mitigate risks associated with construction projects. However, it's essential for all parties involved to communicate clearly, adhere to contractual agreements, and address any disputes promptly to maintain positive relationships and facilitate successful project outcomes.