Retainage (retention)
Retainage protects the owner against defects, latent flaws or poorly executed work: instead of paying 100% of each progress payment, the owner holds back a percentage agreed in the contract. That accumulated money acts as a financial backstop; if problems appear, the owner can use it to correct them without depending on the contractor coming back.
It works payment by payment: at each billing period the amount of the work completed is calculated, and the retainage percentage is deducted before paying. The fund builds up over the course of the project and is released at the end, when the work is accepted, often against the delivery of a warranty bond covering latent defects.
It should not be confused with recovering the advance payment: recovery recoups money that was already paid to the contractor up front, whereas retainage sets aside money that has not yet been paid. Both deductions can appear on the same progress payment. On public projects, public works laws and their regulations govern this retainage and the associated guarantees.
Formula
Example
With 5% retainage on a $500,000 progress payment: retainage = 500,000 × 0.05 = $25,000. The contractor is paid $475,000 and the $25,000 accumulates in the retainage fund, which is returned to the contractor at final settlement once the work has been accepted.
Frequently asked questions
How is retainage calculated on a progress payment?
You multiply the payment amount by the agreed retainage percentage (typically 5–10%). That amount is deducted from the payment and accumulates in the retainage fund until final settlement.
When is retainage released to the contractor?
When the project is finished and accepted, normally at final settlement. Many contracts release it against the delivery of a warranty bond that covers the latent-defects guarantee period.
What is the difference between retainage and recovering the advance payment?
Advance payment recovery recoups the money that was already paid up front; retainage sets aside a percentage of the payment as security for good workmanship. They are different deductions and can both apply to the same progress payment.