Retainage: Overview, definition, and example
What is retainage?
Retainage refers to a portion of the contract payment that is withheld by a client or project owner until a construction or service project is satisfactorily completed. It serves as a financial incentive for contractors or subcontractors to complete their work according to the agreed terms and quality standards.
For example, in a construction contract, the project owner may withhold 10% of each progress payment until the contractor completes all required work and corrects any deficiencies.
Why is retainage important?
Retainage is important because it provides security for project owners, ensuring that contractors fulfill all obligations before receiving full payment. It also incentivizes quality workmanship, as contractors must complete punch list items and resolve any outstanding issues to receive the retained amount.
For contractors and subcontractors, retainage impacts cash flow, making it essential to plan for the delayed release of funds. Clearly defined retainage terms help prevent disputes and ensure timely payment once contractual obligations are met.
Understanding retainage through an example
A general contractor signs a $1 million construction contract with a property developer. The contract includes a 5% retainage provision, meaning that $50,000 is withheld from payments until the contractor completes the project and passes the final inspection.
In another case, a subcontractor performing electrical work agrees to a contract where 10% of each progress payment is retained. Once the subcontractor finishes all work and addresses any deficiencies, the retainage amount is released after final approval by the project owner.
Example of a retainage clause
Here’s how a retainage clause might appear in a contract:
“The Owner shall withhold retainage in the amount of [X]% from each progress payment. The retainage shall be released upon substantial completion of the work and resolution of all outstanding deficiencies, provided that all contractual obligations have been met.”
Conclusion
Retainage is a financial mechanism used in contracts, particularly in construction, to ensure project completion and quality compliance before final payment. It protects project owners while motivating contractors to fulfill their obligations. A well-drafted retainage clause in contracts provides transparency, helps manage expectations, and prevents disputes over withheld funds.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.