Elevate takeoffs for faster bids and increased project success for FREE. See Details Here.

PlanHub’s Q2 Research Reveals Many Opportunities. Register for the Webinar and Learn More

The Basics of Construction Retainage

a clock

As if managing cash flow for your construction company isn’t difficult enough, if you’re working on a commercial project, you may also have to deal with retainage. The practice of short-paying contractors’ invoices to secure completion of the work started as early as the 1800s. These days it’s a part of the law in most states. We’ve got more information on this strange practice, including when retention is released and how to record it in your accounting system.

What is retainage?

Retainage, or retention, is an amount of money that is withheld from each payment to contractors on a construction project. It is most common in commercial construction. Owners and contractors withhold funds to provide an incentive to finish the project according to the owner’s specifications and to serve as funding if there is a problem on the job.

In most states, retention is mandated on certain projects by state law. In addition, the law often caps the amount that can be withheld on projects in that state.

Retainage for a specific project is stipulated in the prime contract between the project owner and the general contractor. Often the retention rate and terms of payment flow down through the general contractor’s contract with each subcontractor.

Who holds retention?

Generally, withholding retention flows down through a project’s contracts. The prime contract stipulates the amount that will be withheld from the general contractor’s payments, and each subcontract the general has also stipulates the amount that will be withheld (usually the same amount as the prime contract).

In most projects, the owner and general contractor withhold retention and are responsible for paying it out once the project is complete.

How much is withheld?

The retainage rate, or how much is withheld, can vary by project. It is usually calculated as a percentage of each payment, usually 5 or 10%. The rate is specified in each contract. Some states have limits on how much can be withheld. For example, in Oregon the limit is 5% and in New Mexico retainage is not allowed.

Say a general contractor has billed its customer $100,000 for a project. With 5% retention the contractor will receive a payment of $95,000. With 10% retention the payment will be $90,000. The balance is tracked until the final payment is made once the work is complete.

When is retention released?

Most contracts stipulate that retention is paid at final completion, once the punchlist work has been finished and the owner has moved in or taken ownership of the project. On large projects this final payment can be quite substantial, so it is in the contractor’s best interest to finish the project quickly so they can get paid.

Some contracts allow contractors to apply for early payment of some retention funds. This can usually be done after the project meets a milestone of completion, usually 50% complete. The contractor sends the owner an application for payment requesting the funds, and when it is approved, the owner makes the payment.

How to record construction retainage

The concept of retainage is unique to the construction industry. Because of this, most general accounting programs do not know how to handle it. That’s why it pays to use software that is designed for the industry. However, it is possible to record retainage using general accounting software if you know how to do it.

Recording retainage held on your invoice

If you are a general contractor or a subcontractor billing a general contractor, you will need to record the amount of retainage that will not be paid until the end of the project. This is done through a separate general ledger account called Retention Receivable. When an invoice is recorded, the retention will go to this account, with the balance going to Accounts Receivable. 

Retainage held on your subcontractor’s invoice

If you are a project owner or general contractor with a contractor or subcontractor that has sent you an invoice, you will need to record the retainage that you will not be paying until the work is completed. This is done through a general ledger account called Retention Payable. When an invoice from your vendor is recorded, the retention will go to this account, with the balance going to Accounts Payable.

Conclusion

Hopefully this article has helped you understand retainage and retention better. Unfortunately, it’s almost unescapable in the commercial construction sector. Be sure to take it into consideration when you do your cash flow planning, as it can significantly affect the amount of money you receive throughout a project.

Be the first to know

PlanHub insights, resources, and news, sent directly to your inbox.

    planhub
    planhub icon

    Data and Deep Insights

    We make construction smarter by connecting with the right people, at the right time, for the right project.

    With our technology and data intelligence, we empower construction professionals to easily build the right business relationships, streamline pre construction processes, and make efficient decisions.

    From competitive intelligence in each project allowing you to know how many other contractors are downloading or bidding to insights as to contractors’ performance, we provide the data you need to lead your business to success.

    By providing faster, simpler, and unmatched data insights in each step of the pre construction process, PlanHub helps your business lay a strong foundation for the success of the rest of the construction process.

    planhub icon

    Bid Leveler & Proposal builder

    Comparing bids to one another has never been easier. Users can now see bids side by side, compare bid amounts, and review subcontractors’ certifications and qualifications all in one place.

    Bid Leveler’s apples-to-apples approach allows you to easily drill down and see detailed, easy-to-scan cost breakdowns. Indicate bid preference, hide bids that don’t meet your needs, and request needed information from subs.

    planhub icon

    Full Bid Management

    From the initial decision to pursue a project to the final bid submission and follow up, bid management plays a central role in pre construction.

    Effectively managed bids during the preconstruction phase set the stage for a successful project execution and satisfied clients.

    Streamline bid management from project posting to estimating, bidding, and awarding in one place with easy project posting, project-contractor automatic matching based on trades, location, and qualification with PlanHub.

    Use bid planner, bid builder, bid leveler, and award tools to always know what’s going on with each project and bid.

    planhub icon

    Estimation and TakeOff

    Let’s face it—time is money. And the more time it takes to perform takeoffs and submit bids, the more you risk losing out on valuable revenue opportunities. Manual methods and locally installed desktop software slow your takeoff process, and many digital solutions currently on the market can be overly complex and not user-friendly. 

    Build faster takeoffs, get more bids out the door, and win more projects. Forget pen and paper, outdated desktop software, and overly complicated digital takeoff solutions. PlanHub’s easy-to-use Takeoff tool helps you and your team build accurate takeoffs faster, minimize errors and material waste, and win more projects that boost your business growth. Performing your takeoffs with PlanHub allows you to:

    • Streamline and integrate your process: Perform your takeoffs in the same platform you use to manage your network and bids.
    • Avoid costly estimating errors: Get better accuracy with digital tools instead of traditional, mistake-prone pen and paper.
    • Collaborate easily: Share and work with your team, no matter where you—or they—are located.
    • Submit more bids and win more projects: Get quality bids in front of general contractors faster and get ahead of your competition.
    planhub
    planhub icon

    Document Management

    Organize, store, and manage various documents, blueprints, drawings and other information related to projects before the actual construction phase begins.

    This phase is crucial for setting the foundation of a successful construction project, and effective document management plays a significant role in ensuring that all necessary information is accessible, accurate, and up-to-date to all interested parties.

    Access, review, work on, and share large complex documents in one platform with amazing speed. From project definition, drawing management, takeoff, estimation, bid management, and contracts, everything happens in PlanHub.

    planhub crm
    planhub icon

    CRM

    Be part of a construction professionals’ ecosystem that enhances collaboration, streamlines project management, and fosters smart relationships between companies, construction professionals, and projects.

    Enjoy seamless communication, build strong relationships, and streamlines project management. By leveraging the power of connections and collaboration, we enhance efficiency, save time and resources, and drive collective growth in the industry.

    planhub network
    planhub icon

    1M+ pre-qualified network

    PlanHub is the leading platform that connects companies, construction professionals, and projects in the pre-construction industry, focusing on building and developing meaningful relationships to enhance efficiency and productivity.

    We have integrated general contractors, subcontractors, and material suppliers’ workflows in one platform to simplify the complex back and forth usually present in preconstruction. By allowing all interactions to be done through PlanHub, tracking projects and relationships is much easier, saving contractors and material suppliers time and money. Interactions in the platform are tagged and measured to provide insights to users.

    General contractors create bid packages that are shared in PlanHub as projects. They can include templatized lists of all CSI cost items as part of the new Baseline feature. Baseline allows for faster and more accurate bid requests, facilitates homogenization of subcontractors’ bids, and simplifies the comparison of incoming bids.

    Subcontractors are automatically matched with relevant projects based on their profile, preferences, and pre-qualification information saving hours of research to both sides. They can review project details, documentation, and blueprints.

    planhub icon

    High-quality projects

    Your one-stop job for qualified hard-to-find private project leads in varying stages like pre-planning, bidding, etc., and across different geographies, zip codes, or distance to your office.

    Projects include plans, specifications, bid dates, and other relevant project information.

    You can segment project leads by type of project, status, project building use, trades and sub trades, or create your own list of keywords — and be notified when one of them is found in a posted project’s documentation or plans.

    We make it simple to find projects that match your business — and make sure you are notified right away.

    				
    					<script src='https://planhub.com/wp-includes/js/jquery/jquery.min.js' id='jquery-core-js'></script>
    <script charset="utf-8" type="text/javascript" src="//js.hsforms.net/forms/embed/v2.js"></script>
    <script>
      hbspt.forms.create({
        region: "na1",
        portalId: "7063061",
        formId: "ced7254f-5c61-49b9-9ce0-6f870b79a958"
      });
    </script>
    				
    			

    Get the report!

    From the very beginning, PlanHub has been a place where people can do meaningful work and build strong relationships.

    Come grow with us! We’re building innovative technologies that simplify preconstruction for everyone.

    Expand your network and connect with general contractors, subcontractors, owners, architects, and suppliers – not to mention thousands of relevant projects at your fingertips.

    Generate relevant leads, faster and with precision. 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.

    PlanHub’s advanced suite of bid management tools allows you to increase productivity, identify relevant projects using data, build bids with Takeoff, and manage bids through the entire process.

    Create quicker, improved takeoffs effortlessly. PlanHub’s Takeoff Core aids your team in accurate, faster estimates, minimizing errors, and driving business growth.

    Expand your network and connect with general contractors, subcontractors, owners, architects, and suppliers – not to mention thousands of relevant projects at your fingertips.

    Generate relevant leads, faster and with precision. 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.

    PlanHub’s advanced suite of bid management tools allows you to increase productivity, identify relevant projects using data, build bids with Takeoff, and manage bids through the entire process.