Retainage is a common payment tactic in the construction industry, where a portion of payment is essentially held hostage until the work is properly finished. Also called retention, it鈥檚 primarily used as a motivational tool to ensure that the contractor or subcontractor will satisfy their contract obligations.
But some predatory prime or general contractors use retainage as a weapon, tacking on back charges or other penalties to reduce the payment amount. It some cases, prime contractors try to withhold the entire amount of retainage. In this article, we鈥檒l talk about steps a subcontractor can take on any project to get the GC to pay retainage back faster.
What is retainage?
Retainage聽is calculated as a percentage of the work value, usually around 5% to 10% of the contract price. It鈥檚 common in both private and public construction contracts.
Retainage is generally governed by the contract terms. Retainage聽provisions are typically included in the construction contract between the property owner and the general contractor (GC), and between the GC and the subcontractors. Generally, the owner or GC should release the retainage聽payment within a set period after your work is substantially complete. Unfortunately, this isn鈥檛 always the case.
The retainage struggle is real
The rise of retention in the construction industry causes significant cash flow problems for contractors. In the聽2019 Construction Payment Survey Report, 57% of contractors said retainage is “always” or “sometimes” withheld. And their view of the practice isn鈥檛 very rosy. 鈥淩etainage in our industry is a way for companies to take an extra 10% off the top,鈥� one respondent said. 鈥淭hey will make up reasons not to return it that have nothing to do with your company.鈥�
Getting retainage back
If you鈥檝e had trouble getting retainage back on previous construction projects, you’re not alone. We get questions like this about options for recovering retention quite frequently. That’s why we’re here. Keep reading for a series of steps you can take before, during, and after the project to make sure your payment rights.
If your project is already over, and you鈥檙e trying to figure out what you can do now to collect retainage, skip ahead to 鈥�After the project.鈥� Then come back and read this article again before you start your next job.
Before the project: Research, negotiate and set expectations
Before any construction project begins, set expectations for the hiring party, as well as your own office manager or other staff.
Research your state retainage rules
Some states, like New Mexico, prohibit retention on subcontractors. Others, like Utah, limit retainage to 5% of the contract amount. However, most states don’t have set limits on how much retainage can be held, and for how long.
Choose your state from our retainage map to view more details about state requirements and limitations.
Negotiate better retainage terms
The contract defines retainage terms. If you鈥檝e been burned by retention before, you might be hesitant to agree to it again. Fortunately, as with most contract provisions, it鈥檚 negotiable. Here are some starting points for negotiation.
You can ask for a聽谤别迟补颈苍补驳别听产辞苍诲聽in place of retention. With this type of performance bond, the GC agrees to waive retainage if you pay the surety premiums. This generally only makes sense on a large project, if the bond premiums are significantly less than the retainage聽amount.
Alternatively, you can request variable retainage, with a reduced or zero rate once you鈥檝e finished a certain portion of the project. In this scenario, you can theoretically get retainage back before you鈥檝e finished the work. The GC could retain 10% of your progress payments until you are 50% complete, then reduce retention to 0.
Best case: Ask the GC or owner not to withhold anything. The strength of your argument here will depend on the level of experience and work history you can prove. The more trust you can build into the relationship at the beginning, the better your chance of winning agreement.
Establish a credit policy
Because slow or late payments are so common in construction, establishing a聽credit policy聽is important for any contractor. This policy outlines how you extend credit, how long you will extend it for, and the actions you will take to collect it. Provide your credit policy to the GC or project owner to set their expectations from the beginning.
If you鈥檙e not sure where to start,聽download this sample credit policy from 麻豆tv大片 for free.
Create a document retention strategy
When it comes to collecting construction payments, including retention, what matters isn鈥檛 the work you鈥檝e done; it鈥檚 the work you can prove. 础听document retention strategy聽outlines how you will collect and maintain records on each project.
For retainage, this includes approved payment applications, change orders, continuation sheets, and any other document that shows the amount retained by the hiring party. Keeping these records while the project is ongoing will help you prove that you deserve that retainage聽payment if you have trouble collecting it later on.
Send preliminary notices
Send preliminary notices聽on every job. Preliminary notices let the property owner, lender, GC, and other parties up the payment chain know that you鈥檙e on the job. Sending notices shows that you鈥檙e organized, professional, and serious about the project. When it comes time to pay retainage, the paying parties are less likely to 鈥渇orget鈥� to pay you.
During the project: Exchange payment documents correctly
This seems like a no-brainer, but you鈥檇 be amazed at how often subcontractors submit incorrect, incomplete, or late documents. Payments flow much easier when people exchanged the correct paperwork, at the right time, with the right people.
First, review your contract to ensure you understand exactly what the GC or owner requires when you request payment.
Get changes approved in writing
If the owner or GC asks you to change the work in the contract, ask them to sign a聽change order. This serves as an official acknowledgement of the work they鈥檙e requesting and the cost associated with it. An approved change order ensures that another party can’t cite the change as evidence of defective work.
Without an approved change order, the GC or owner could dispute your work after the project. They may try to claim some of your retention as a聽back charge聽or other penalty.
Submit detailed payment applications
A thorough聽payment application聽can encourage the prime contractor to release聽retainage quickly at the end of the job. Your pay application should be as detailed as possible. Look at your contract to make sure you鈥檙e meeting or, better yet, exceeding the requirements. 聽Include attachments that support your request for payment, like approved change orders, the schedule of values or continuation sheet, vendor invoices, etc.
Submitting a detailed pay app accomplishes two goals:
- It makes it easier for the owner or GC to review (and approve) your request.
- It serves as a record of both the payments you collect and the retainage you鈥檙e still waiting for.
Send conditional lien waivers
础听lien waiver聽is essentially a receipt or a 鈥減roof of payment.鈥� When contractors get paid, they sign waivers to acknowledge the payment amount and release their right to file a lien against that amount. It may go into effect the moment it is signed, or it may not be valid until the person signing actually gets paid – it depends on the type of waiver.
It鈥檚 also important to note that waivers can be for the final payment or just for partial payments. They are exchanged frequently on construction jobs, so it鈥檚 important to have a clear process for handling incoming and outgoing waivers.
Use software to track documents and payments
Unless you鈥檙e only working on one project at a time, it can be difficult to stay on top of all of the construction documents you send, and whether you鈥檝e been paid. Software can help you send and track your payment progress on multiple jobs simultaneously.
Maybe you use an Excel spreadsheet and file folders to record the construction documents you submit and receive. Maybe you use a company like 麻豆tv大片 to send, manage, and track your payment documents. What matters most is that you find a process that ensures nothing is falling through the cracks, and follow it.
After the project: Request your retainage firmly
If you鈥檝e followed all of the steps in this article before and during the project, then the GC or owner shouldn鈥檛 have any reason to delay the release of聽retainage. They know you鈥檙e serious about collecting what you鈥檙e due. They want to avoid a dispute that derails the project.
At this point, the best strategy to collect retainage is to communicate clearly, firmly, and often. Send an invoice, send invoice reminders, and protect your right to file a mechanics lien if they don鈥檛 pay the retainage.
Send a retainage invoice or application before the deadline
Once your contract work is substantially complete, the hiring party should pay your retainage according to the contract deadline. For example, the contract may give the GC 14 days from substantial completion to pay your retainage. Before the deadline arrives, send a payment application or invoice for the retainage. Don鈥檛 assume that the owner or GC will submit the retainage聽payment on their own.
Send an invoice reminder (or several)
If you鈥檙e still waiting after the deadline, be proactive. Make sure you communicate clearly and firmly about your intentions, so they don鈥檛 have any excuse.
厂别苍诲颈苍驳听an invoice reminder聽can be enough to jog a payment loose from the GC or owner. They might not be as organized as you are, and your retainage聽payment may have gotten held up unintentionally. At the very least, an invoice reminder should spur them to communicate about why the payment is delayed.
Send a payment demand letter
Sending a payment demand letter can be an effective way to recover retainage. You can send a demand letter along with an invoice reminder (see above), with a notice of intent (see below), or by itself. It can be as friendly or as threatening as the situation calls for.
Take the time to ensure you鈥檙e sending it to the right person. Put it on professional letterhead. And聽write an effective demand letter that gets you paid.
Send a notice of intent (to lien)
If you鈥檙e still waiting for retainage past the contract deadline, send a聽notice of intent聽(NOI) to the GC, property owner, and/or lender. The parties at the top of the payment chain will do just about anything in their power to avoid a mechanics lien. 麻豆tv大片 data shows that more than 47% of NOIs are paid within 20 days of delivery. 麻豆tv大片 users with NOI policies see 90% of NOIs paid within 90 days.
As for the recommended timing to send an NOI, that will depend. If you鈥檙e in a state where an NOI is required in order to file a mechanics lien, send it within the state deadlines. If the state your project is in doesn鈥檛 require NOI for a lien filing, send one anyway.
File a mechanics lien
If there鈥檚 still no sign of your retainage, it may be time to use one of the most powerful tools in a contractor鈥檚 belt. At this point, consider聽filing a mechanics lien. Retainage represents an amount the GC owes you for work completed. So in most cases, you should be able to file a lien on that amount. Every state has their own guidelines and requirements to file a lien claim. Make sure you understand the rules where you live, and follow them closely.
Filing a mechanics lien to recover retainage can get tricky. In some states, the deadline for a subcontractor to file a mechanics lien may be shorter than the deadline for a GC to release retainage. The answer to this question in our Expert Center illustrates the dilemma. In Tennessee the deadline for any contractor to file a lien is within 90 days of last furnishing labor or materials to the project. The deadline for the owner to pay retainage to the GC is within 90 days of substantial completion. The GC then has 10 days to pay retainage to their subcontractors. So you can see how the subcontractor’s lien deadline could pass while they’re waiting for the GC to pay retainage.
Consider legal action
If the lien filing deadline has passed and retainage is nowhere in sight, it could be helpful to consult with a construction attorney. A law firm that specializes in construction issues can help you assess what options are on the table, and whether it’s worth legal action.