Retainage of Payment, What's the Purpose?

In the last blog, we talked about the punch list and briefly touched on retainage. This month, as part of a look into the "Construction Alliance" and the "Construction Guidelines", we are going more in-depth to discuss why "Retainage of Payment", is an important part of construction, but one that could have a cost implication. 

What is Retainage of Payment?Retainage2

Retainage of payment is more commonly referred to as retention of payment or simply retention. It is a percentage of the progress payment (refer to 2021-01-05 blog "Progress Payments - Who Doesn't Want To Get Paid?) that the Owner holds out from each application for payment. In a typical contract, Owners pay 90 to 95 percent of the progress payment. The 1 to 10 percent withheld from the payment is not to be viewed as an incentive to the Contractor to get the work done. Instead, it is meant to be fair for the Owner and the Contractor, providing for errors in estimation of completed Work or protecting the Owner from defective work in place.

Image from levelset.com

Is there a difference between public and private work retention?

Depending on whether work is being performed for the Federal Government, a State, a Local Municipality or City, there are different laws that control how retention may be withheld. If you are doing work on any public project, it is best to fully understand those statutes or laws that are in place. Private work may proceed with or without retention, depending on the Contract between the Owner and Contractor.

How does it work?

Depending on the percentage of retention withheld agreed upon in the Contract, the Contractor will indicate in a specific column of the pay application the amount of retention in dollars related to the amount being requested. On short-duration projects, this is not usually a problem. However, it is when the Construction takes place over the course of many years, the Contractor and their sub-contractors may suffer from not being fully compensated. For example, the subsurface contractor completes the work within the first few months of the project, has the retainage held, but the work continues for another 4 years. This becomes a dilemma for the Contractor, to pay that subcontractor in full or to continue holding retention.

One way to be fair to all parties, is to set up an interest-bearing escrow account and deposit the money there. This way, the money remains under Owner control, but the Contractor is paid in full plus the interest accrued to the retained funds at the completion of work. Likewise, the Contractor could do the same for their subcontractors.

Retainage1

How long is retainage held?

Typically retainage is held until Substantial Completion. At this point, the amount being withheld is dropped down to cover the estimated cost for completing the work in the Punch List. However, depending on how the Contract and the General / Supplemental Conditions of the Contract are written, retainage may be reduced at set milestones. There are many ways to do this. For example, retention is reduced from 10 to 5 percent at 50 percent of completion. This would allow for the Contractor to pay, in full, subcontractors that have completed their work early and have no defects in the work that need to be resolved.

 

Image from nrla.org

Final thoughts!

I have been involved in many projects, and retention is one of those topics that should not be taken lightly. The Owner should remember that this is not meant to be held as an incentive for the Contractor to get the work done. There is enough incentive to complete the work as soon as possible, get off the job site, and onto the next project. As any Contractor would agree, the longer they remain on the site, the less money the project makes.

Please make certain to read the guideline "Retainage of Payment", and if you have any comments, please let me know. I'd love to hear your thoughts. Next month join me as we discuss the "Safety Consideration".

 

Till next month…

Steve Gantner RA, CSI, AGCMO, SCIP, CCS, CCCA

Senior Specifier - Conspectus, Inc.

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