What Is Retainage In Construction?
What Is Retainage In Construction?
Retainage refers to the practice of withholding a certain percentage (usually between 5-10%) of the total amount paid out to contractors and subcontractors in the construction industry.
This payment is withheld until all contracted work has been completed satisfactorily, ensuring that both parties are satisfied with their respective roles in the project.
The primary contractor then withholds retainage from its subcontractors, who may also retain it from sub-subcontractors and suppliers as a guarantee of quality and completion.
What Is The Difference Between Retention And Retainage?
Retention and retainage are often used interchangeably, however, there is a distinct difference between the two.
Retention is the full amount of funds agreed upon in the contract that are held back. Retainage, on the other hand, is just a portion of those funds (not necessarily all) that are kept back until certain criteria have been met.
Generally speaking, retention is an assurance that payment will be made while retainage serves to ensure contractor performance as it guarantees they will not receive their full payment until all contracted work has been completed satisfactorily.
Why Do Contractors Hold Retention?
Contractors hold retention to protect the employer from receiving incomplete services and to give the contractor incentive to do a good job.
The money held back is often referred to as ‘retention pay’ and is usually a percentage of the total contract price, usually between 5-10%, which is released when the project is completed in full and meets all agreed standards.
This provides contractors with an added sense of responsibility, knowing that if they fail to complete a job properly the chances are they won’t receive their full paycheck.
Retentions also provide employers with some security should any problems arise after the completion of the project, allowing them time to fix any issues before releasing payment.
How Long Can A Company Hold Retention?
A company can hold a retention for the first moiety, which is generally a percentage of the contracted amount.
Following that, there is an allocated period of 12 months – known as the defects liability period – where the contractor (as well as any sub-contractors) are liable to rectify any issues or faults that may occur with their work during this time and ensure it meets the agreed specifications.
This acts like an additional warranty to ensure quality assurance in all aspects of the project.
Is Retainage A Deposit?
Retainage is not a deposit, but it is similar in that it involves money being held back. Retention is stated in the project contract as an amount that will be withheld from payments due to contractors until the project or certain elements of it are completed satisfactorily.
This money acts as a security against poor or incomplete work and is released once the work has been finished according to the terms and conditions laid out in the contract.
While retainage may seem like an extra cost for contractors, it also provides them with the assurance that they will be paid for their efforts.
Is Retainage A Current Liability?
Retainage, which is withheld from contractors by governments during public works contracts and other construction projects, is not considered a current liability under the Governmental Accounting Standards Board (GASB) Interpretation No. 6.
Rather, GASB defines retainage as not becoming a current liability until it becomes due and payable upon satisfactory completion of the work being contracted for. Therefore, retainage does not meet the definition of a current liability in government funds until it has been paid out.
When Shall The Owner Release The Retention Money To The Contractor?
The owner is obligated to release the total retention money upon final acceptance of the works.
This means that once all the project deadlines have been met and all the stipulations set out in the contract between both parties have been fulfilled, then they will pay out the retention money to the contractor.
The amount owed should be specified within the agreement signed when beginning work on the project and will depend on many factors, such as duration and budget.