An Overview of Contract Retention in Construction: What You Should Know
Contract retention, also occasionally referred to as contract “retainage,” is the amount of money that gets held back from (or retained) from a contractor or subcontractor during the construction process. This is a practice that is quite common within the construction industry, but not as common in other types of industries.
You’ll often find construction contracts mandate a certain portion of the contract price (usually five to 10 percent) gets withheld until the project is completed. This can create some cash flow problems for contractors, and considering the cash flow issues that are inherent to the world of construction, you can see where the practice of contract retention might place some hardship on contractors during the course of a job.
Why does contract retention exist?
There are plenty of critics of the contract retention process, who say it places undue hardship on contractors. However, those in favor of the practice would say it financially incentivizes contractors to get the job done correctly right away, and protects other stakeholders in the event of issues that might arise during the project.
The practice began in the early to mid-1800s, and today is regulated as part of the construction industry, though there continue to be calls to abolish the practice entirely.
The big sticking points with contract retainage tend to be a) how much money should be withheld and b) how long that money should be held.
As a property developer or general contractor, you will likely need to consider how you’ll use retainage to protect yourself against any problems that could arise on your next job. For subcontractors, the issue is more likely to be how you can avoid having money withheld on the job at all, or at least minimize the amount that would be withheld through contract retention.
You’ll want to make sure you spell this issue out very clearly in any construction contracts to which you become a party. There are limits to what the parties can agree on when it comes to contract retention, so it is important to first understand what you will have to do before you can negotiate what you will do within those limitations.
If the contract does not address retention at all, then retention will not exist. The contractor will not be allowed to withhold money from the subcontractor. Any withholdings in the form of retention must be agreed to in writing, so if there is no agreement in place then there is no retention. Parties will frequently include retention agreements within their contracts—not often will you find a contract that includes no language about retention at all.
For private jobs, there’s about a 7.5 percent average retention, but the retention averages go down for government jobs.
You should make sure there is clear language dictating how long the money can be withheld for. When there are no stipulations in place, there’s no incentive for the withheld money to be paid quickly. Therefore, contractors subject to retention should shoot for quick payment periods.
For more information about contract retention and how to deal with it in your contracts, contact us at Patin and Associates.