Retainage is usually 10% of a contract which is held by the owner until work is completed to assure a contractor completes what he was hired to do. This represents the final payment which is held by owner until the punch list is essentially punched out. In theory it makes sense because if you pay in full before the work is completed, how can you assure the contractor will finish at all. On the other hand, if the contractor believes he has finished 100% of his work but disagrees with the punch list, that’s not fair either.

Let’s imagine you are the contractor and you sign an agreement directly with an owner to build a project for $5Million. This means essentially retainage represents $500K. How much do you think contractors make on a $5Million project? Of course, it depends on what part of the country you are in, whether it’s residential, commercial, what finishes are included, etc. but on average what are we talking about here? I imagine, it’s hard to believe they earn much more than 10%, which means the retainage is 100% profit.

Ouch, that’s a lot of leverage for an owner over a contractor. Not to mention, the contractor has practically financed the project since day one. Yes, think about it. If the contractor works for 30 days then submits a payment application and must wait another 30 to 45 days to get paid, that means he has financed at least 60 days of work into the project before seeing a penny. Then the contractor is in the rears chasing his next payment the duration of the project. Ok, the contractor hopefully has good terms with his suppliers, but what about labor? I’m pretty sure every man on the job gets paid weekly. How else are they going to take care of their families and show back up the following week with a clear mind ready to work? I don’t know but it sounds to me like the contractor is more like the lender but isn’t charging interest for taking the risk and bank rolling the project. In fact, after he invests his money into labor, general conditions, materials, rentals, etc. he’s basically waiting to get reimbursed.

Of course, for those of you who understand a little bit about construction accounting, the contractor’s receivables are an asset which is most likely being leveraged for a line of credit too. Somehow the contractor is getting by and producing financials which his banker and surety are working with, but this is no easy task. What if the contractor has three projects that started at roughly the same time and hasn’t gotten paid retainage from any of them yet? It’s not to say he never will, but damn that’s a lot of work, sweat and tears to finally reach the end of a project and you still haven’t turned a profit. Maybe that’s why some of these contractors are so rough around the edges. Imagine carrying that kind of weight and pressure around with you all the time. Sadly, a lot of contractors believe getting more work is the answer.

In a perfect world, the owner is an honest investor, has a respectable team around him that understands construction and has every intention of paying the contractor his retainage in full as quickly as possible. Sounds sweet doesn’t it. That’s not always the case. Sometimes, the owner’s punch list includes items that are not even part of the contractor’s scope of work, work that was already completed correctly and signed off but now damaged by others or completed in tolerance but the owner’s rep is still saying “No, that’s not acceptable”.

Somehow the punch list is getting longer instead of shorter and the project is becoming a burden. At this point the contractor has exhausted his ability to be a team player and finish the punch list, but the owner is not being reasonable and still holding retainage. Let's not even get into the change orders that were completed by the contractor and not approved yet as promised, or the delays caused by revisions beyond the contractor’s control that extended the general conditions.

The contractor then faces a major decision. Does he continue to wait and work with the owner trying to complete the punch list or does he hold his ground and put the owner on notice? That’s another ouch. If the owner didn’t release the retainage when you were working and in good graces, what incentive does he have to do it now when you put him on notice and already finished the work? Not a good situation to be in. I guess that’s why contractors negotiate for reduction of retainage at some point and try to get as much money as possible on their side before the owner realizes he is over budget and starts looking for ways to keep the money on his side.

This is not the case on every single project out there, but it definitely is challenging for contractors to collect 100% of their retainage on time or even at all, after completing the work and getting stuck with an outrageous punch list.

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