Withholding retainage, often known as “retention,” is a systematic method to guarantee that a contractor or subcontractor completes work entirely and appropriately. A construction project’s retainage is set by the construction contract between https://www.bookstime.com/ the parties, in which both sides agree to some percentage withheld from each progress payment. Because retention is withheld from each payment and paid at a later date, the unpaid funds have to be recorded and tracked accurately.
How long is retainage withheld?
However, from an owner standpoint, this is an easy way to guarantee that the work gets done by providing an incentive of a big check at the end of the project. Having a good accounting software in your business toolkit can significantly improve your financial management when it comes to retainage and otherwise. With QuickBooks Online, you can track expenses, income, and cash flow and receive detailed insights into your business’ financial situation. While retainage may seem to give you little-to-no control over ensuring you receive full payment for your completed work, that’s not necessarily the case.
An Overview of California Retainage Rules
This means that contractors or subcontractors whose work comes near the beginning of a project may have to wait months or years to collect all of the money owed to them. Retention, also called retainage, is money held back from each payment to ensure that a contractor or subcontractor completes a project. It provides a financial incentive to ensure that the work is of appropriate quality and meets the plans and specifications. It is intended to cover additional expenses if the contractor or subcontractor doesn’t finish the work or there is a quality issue. (3)When the owner makes payment of retentions earned directly to the escrow agent, the escrow agent shall hold them for the benefit of the contractor until such time as the escrow created under this contract is terminated. The contractor may direct the investment of the payments into securities.
Plan cash flow needs ahead of time.
As the project progresses, the retainage percentage affects the payment schedule. Typically, progress payments are made throughout the project’s various phases, with the retained amount subtracted from each payment. This retainage in construction serves as an incentive for contractors and subcontractors to meet milestones, maintain project schedules, and ensure work quality. Retainage involves reserving a fraction of the project’s payment for a specified period.
Evaluate your risk of non-payment on a case-by-case basis, and don’t hesitate to exercise your lien rights when needed. The first step to getting your retainage payment is to submit your final payment application accurately and on time. Ensure that you provide all the necessary paperwork and details correctly, as any missing or incorrect information may lead to GCs rejecting your pay app, which can cause further delays. Profit margins on construction projects are already thin—sometimes running as low as 5-10%. Retainage rates can easily equal (or surpass) the entire project’s profit margin. In most cases, sending the required preliminary notice for the project’s state is sufficient to protect the potential claimant with respect to all s/he is owed on the project, including retainage.
- What this means is that general contractors may have to wait a couple of months for full payment, while subcontractors may have to wait up to 5-months or longer.
- This means that contractors or subcontractors whose work comes near the beginning of a project may have to wait months or years to collect all of the money owed to them.
- Has your company been in business for a long time with an equally long track record of success?
- Withholding retainage, often known as “retention,” is a systematic method to guarantee that a contractor or subcontractor completes work entirely and appropriately.
- Since these funds aren’t due until the project is completed, they are recorded in a separate account on the general ledger.
- Failure to provide the correct lien waiver may result in the GC withholding your retainage.
ConsensusDocs 710: Application for Payment
How long can retainage be held?
Do the math and plan for your cash flow needs
- You don’t want to get to the end of a project that has funding issues and learn you are not able to have a mechanic’s lien on your retainage.
- Retainage may also get delayed, or not paid at all, at the end of the project.
- The best way to deal with retainage is to acknowledge how it affects your cash flow and plan proactively.
- With access to private, hard-to-find projects, you can connect with architects and owners on projects still in the pre-design and design stages.
- Owners and contractors often blame retention for cash flow issues and payment delays.
- For example, the G702 and G703 AIA-style documents include sections that prompt you to determine the actual amount that you receive minus retainage.
