A retainage is a percentage or portion of payment for a service that would only be paid after the project is completed and judged to be satisfactory by the hirer.
Also known as a holdback, retainage is a term that is usually used in the building and construction industry when a contractor would only be paid the final portion of construction fees upon completion of the project.
It is essentially money earned by the contract, but not yet paid by the landowner who is often the party that hired them.
However, the relationship can be between developers and contractors, and contractors and sub-contractors as well.
The main purpose of having a retainage arrangement is so that the builder would have to complete the construction project in order to receive the final payment.
This enables the hirer to retain a little leverage to demand proper completion.
They might not be motivated to deliver a satisfactory job should there be no incentive for completing it in a timely and professional manner.
For example, a renovation company might collect payments in 3 stages. First upon confirmation of the project, second upon completing the laying of flooring tiles, and third payment upon completion of works. The third and final payment would only be made after the requirements of the contract have been met and final inspection conducted.
It’s not uncommon for certain expenses or damages to be deducted from the final holdback payment in view of unsatisfactory work.
If a lien or charge has been place on the property, then this final payment of retainage would also trigger the release of the charge.
While the terms of payment is an agreement between two or more parties and can be negotiated in any way, industry practice usually don’t have retainages that exceed 10% of contract value.
This means that for a renovation project worth $30,000, the retainage is usually $3,000 or less.
Whole project fee as retainage
Some people might ask why can’t the retainage be 100% of the contract value.
After all, it’s not unusual for a service provider to provide the service offered and only receive payment after delivering it.
The reason for retainage is that construction projects are capital intensive.
Contractors need funds to purchase materials such as desired wallpapers, veneers, quartz countertops, etc.
If they are to use their own money to purchase these materials, they would be exposing themselves to the risk of homeowners not paying up.
This is assuming that the contractor has the funds to operate this way in the first place.
Lack of cash flow and working capital is the number 1 reason contracting companies close down. Many of which are halfway into projects.
And while it can be argued that a charge can be placed on the property to protect the interest of a contractor, it makes little business sense to go this route.
It would be much more sensible for a business owner to work with clients who are willing to meet the payment term requirements than with one who would only pay a one-time fee after works have been completed.
Indeed. Industry practice is to make payments according to milestones reach, and a retainage for completion.
