Retainage
In construction contracts, retainage refers to the practice of withholding a portion of the payment due to a contractor until the completion of the project or some other agreed-upon milestone. The purpose of retainage is to ensure that the contractor completes the job to the specified standards and handles any repairs or follow-up tasks that may be necessary. It acts as a financial incentive for the contractor to finish the project satisfactorily and on schedule.
Key Points:
- Purpose: To ensure project completion and quality standards.
- Amount Withheld: Typically a percentage of the contractor’s earnings, often 5-10%.
- Release Conditions: Commonly released upon project completion, the issuance of a Certificate of Occupancy, or satisfaction of specific performance criteria.
Examples:
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Foundation Completion:
- A general contractor earns $5,000 upon completing the foundation. Of this payment, 10% or $500 is held back as retainage.
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Framing Completion:
- The contractor then earns $15,000 for completing the framework. Another 10% retainage means $1,500 is withheld.
-
Roof Completion:
- Upon roof completion, $10,000 is earned with $1,000 retained.
Collectively, $3,000 is held back as retainage from a total potential payout of $30,000. This amount is paid out after a Certificate of Occupancy is issued, signaling the project’s successful and satisfactory completion.
Frequently Asked Questions (FAQs)
What percentage is typically held as retainage?
Retainage is generally between 5% and 10% of the total contract payment, but this can vary based on the contract terms and project requirements.
When is retainage money released?
Retainage is usually released upon project completion, the issuance of a Certificate of Occupancy, or satisfaction of other agreed-upon project milestones.
How does retainage benefit the project owner?
Retainage protects the project owner by ensuring contractors have the incentive to complete all aspects of the work to agreed-upon specifications and standards, and addresses any problems that arise before final payment.
Does the contractor still owe retainage if the project is terminated?
If a project is terminated, the retainage terms would generally depend on the contract specifics. Many contracts stipulate certain conditions for retainage to be released or forfeited within the limits of project progress or any unresolved issues.
Related Terms:
- Certificate of Occupancy: A document issued by a local government agency or building department certifying that a building complies with applicable building codes and is suitable for occupancy.
- General Contractor: A party responsible for the supervision and management of construction projects, including the hiring and overseeing of subcontractors.
- Construction Contract: A legally binding agreement between a contractor and the project owner outlining terms, responsibilities, and payment for a construction project.
Online Resources:
- American Institute of Architects (AIA) Contracts
- Construction Management Association of America (CMAA)
- The Associated General Contractors (AGC) of America
- National Association of Home Builders (NAHB)
References:
- “Practice of Large-Scale Construction Project Management,” NIFES Group.
- “Construction Contracting: A Practical Guide to Company Management” by Richard H. Clough.
Suggested Books for Further Studies:
- Construction Contracts, 3rd Edition by Jimmie Hinze
- Principles of Project Finance by E. R. Yescombe
- The Construction Contracts Book: How to Find Common Ground in Negotiating the 2007 Industry Form Contract Documents by Daniel S. Brennan
